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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL report pursuant to SECTION 13 or 15(d) of the Securities Exchange
Act of 1934.
For fiscal year ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________ to __________________.
Commission file number 333-43697
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 14-1801465
- --------------------------------------------- -------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
52 North Main Street, Gloversville, NY 12078
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(Address of principal executive offices)
(518) 725-6331
---------------------------------------------------
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes__X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference Part III of this Form 10K or any amendments
to this Form 10K [X]
State the number of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding as of December 22, 1998
- ---------------------------- -----------------------------------
Common Stock, $.01 par value 689,055 shares
<PAGE>
Annual Report for 1998 on Form 10-K
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 32
Item 3. Legal Proceedings 33
Item 4. Submission of Matters to a Vote of Security Holders 33
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 33
Item 6. Selected Financial Data 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 33
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 34
PART III
Item 10. Directors and Executive Officers of the Registrant 34
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management 34
Item 13. Certain Relationships and Related Transactions 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 34
SIGNATURES 36
DOCUMENTS INCORPORATED BY REFERENCE
Documents Part of 10-K into which incorporated
Portions of the Annual Report to
Shareholders for fiscal year
ended September 30, 1998 Parts II and IV
Portions of the Proxy Statement
for Annual Meeting of Shareholders
to be held March 4, 1999 Part III
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ITEM 1. Business
General
Adirondack Financial Services Bancorp, Inc. (the "Holding Company" or
"Adirondack Financial") was incorporated under Delaware law in December 1997 as
a savings and loan holding company to purchase 100% of the common stock of
Gloversville Federal Savings and Loan Association (the "Association"). On April
6, 1998, the Association converted from a mutual form to a stock institution, at
which time the Holding Company purchased all of the outstanding stock of the
Association, and the Holding Company completed its initial public offering,
issuing 661,250 shares of $.01 par value common stock at $10.00 per share. Net
proceeds to the Company were $6.0 million after conversion and stock offering
costs, and $5.5 million excluding the shares acquired by the Company's newly
formed Employee Stock Ownership Plan (the "ESOP").
The consolidated financial condition and operating results of the Company are
primarily dependent upon its wholly owned subsidiary, the Association, and all
references to the Company and its financial data prior to April 6, 1998, except
where otherwise indicated, refer to the Association and its financial data.
The Association has operated as a community-oriented financial institution,
obtaining deposits from its local community and investing those deposits
principally in residential one-to-four family mortgage loans and, to a lesser
extent, multi-family and commercial real estate, commercial business, home
equity and consumer loans. In addition, the Association invests excess funds not
used for loan originations in securities issued by the United States government
or its agencies, and mortgage backed securities. Deposits are offered at various
interest rates only within the Association's primary market area. There are no
brokered deposits maintained by the Association.
Forward Looking Statements
When used in this document, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project", or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. In
addition, certain disclosures and information customarily provided by financial
institutions, such as analysis of the adequacy of the loan loss allowance or an
analysis of the interest rate sensitivity of the Company's assets and
liabilities, are inherently based upon predictions of future events and
circumstances. Furthermore, from time to time, the Company may publish other
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors cause the Company's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward looking statements. Some
of the risks and uncertainties that may affect the operations, performance,
development and results of its assets and liabilities, and the adequacy of its
loan loss allowance include, but are not limited to, changes in economic
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conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area, and competition that could cause actual results to differ
materially from historical results and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such
forward looking statements, which speak only as of the date made and to advise
readers that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future periods to
materially differ from any opinions or statements expressed with respect to
future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Regulation
The Association is a federally-chartered savings and loan association and is a
member of the Savings Association Insurance Fund ("SAIF"), which is administered
by the Federal Deposit Insurance Corporation ("FDIC"), which insures the
Association's deposits up to applicable limits. The SAIF is backed by the full
faith and credit of the United States Government. Accordingly, the Association
is subject to broad federal regulation and oversight extending to all its
operations. As a savings and loan holding company of the Association, the
Holding Company is also subject to federal regulation and oversight. The purpose
of the regulation of the Holding Company and other holding companies is to
protect subsidiary savings associations. The Association is also a member of the
Federal Home Loan Bank of New York ("FHLB") and is subject to certain limited
regulation by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board").
The Office of Thrift Supervision ("OTS") has extensive supervisory authority
over the operations of savings associations. As part of this authority, the
Association is required to file periodic reports with the OTS and is subject to
periodic examinations by the OTS. The last regular OTS examination of the
Association was March 1998. Under agency scheduling guidelines, it is likely
that another examination will be initiated in the near future. When these
examinations are conducted by the OTS, the examiners may require the Association
to provide for higher general or specific loan loss reserves. All savings
associations are subject to a semi-annual assessment, based upon the savings
association's total assets, to fund the operations of the OTS. The Association's
assessment for the semi-annual period ended June 30, 1998 was $13,000.
The OTS also has extensive enforcement authority over all savings institutions
and their holding companies, including the Association and the Holding Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
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In addition, the investment, lending and branching of the Association is
prescribed by federal laws, and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissible
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. Federal savings associations are also generally authorized to branch
nationwide. The Association is in compliance with the noted restrictions.
The Company is a unitary savings and loan holding company, and it sole
FDIC-insured subsidiary, the Association, is a qualified thrift lender ("QTL").
Therefore, the Company generally has broad authority to engage in all types of
business activities in which business can engage. If the Company were to acquire
another insured institution as a separate subsidiary or if the Association fails
to remain a QTL, the Company's activities will be limited to those permitted of
multiple savings and loan holding companies. In general, a multiple savings and
loan holding company (or subsidiary thereof that is not an insured institution)
may, subject to OTS approval in most cases, engage in activities comparable to
those permitted for bank holding companies, certain insurance activities, and
certain activities related to the operations of its FDIC-insured subsidiaries.
Capital Requirements
Federally insured savings associations, such as the Association, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings associations. These capital requirements must be generally as stringent
as the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The Association must maintain (a) tangible capital of 1.5% of tangible assets,
(b) core capital of 3.0% of adjusted tangible assets, and (c) a risk-based
capital of 8.0% of risk-weighted assets. Under current law and regulations,
there are no capital requirements directly applicable to the Company. The
Association exceeds all minimum capital standards imposed by the OTS. At
September 30, 1998, the Association had a tangible capital and core capital
ratio of 10.59% and a risk-based capital ratio of 19.62%.
OTS regulations (the implementation of which have been delayed) require that
certain institutions with more than normal interest rate risk must make a
deduction from capital before determining compliance with the minimum capital
requirements. The Association is currently exempt from the deduction requirement
because it has total assets less than $300 million and risk-based capital in
excess of 12%. However, the Association's capital ratios are high enough that
even if the rules are implemented and the exemption is withdrawn, the deduction
would not have a material effect on the Association's compliance with OTS
capital requirements.
The OTS has the authority to require that an institution take prompt corrective
action to solve problems if the institution is undercapitalized, significantly
undercapitalized or critically undercapitalized. Because of the Association's
high capital ratios, the prompt corrective action regulations are not expected
to have an effect on the Association.
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Deposit Insurance Premiums
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. Under the system, institutions classified as well
capitalized and considered healthy pay the lowest premium. If the Association's
capital ratios substantially deteriorate or if the Association is found to be
otherwise unhealthy, the deposit insurance premiums payable by the Association
could increase.
In September 1996, the Economic Growth and Regulatory Paperwork Reduction Act of
1996 (the "1996 Act") became law. Before the 1996 Act, SAIF insured institutions
were paying deposit insurance premiums at a rate much greater than Bank
Insurance Fund ("BIF") insured institutions. The 1996 Act imposed a one time
assessment on all SAIF institutions and then equalized the insurance premiums
for BIF and SAIF institutions. At the same time, the 1996 Act required BIF and
SAIF institutions to contribute to the costs of the "FICO" bonds sold in the
late 1980's to finance the savings and loan bailout. The "FICO" bond assessment
for the semi-annual period ended June 30, 1998 for SAIF institutions was .061%
of insured deposits or $22,000 for the Association.
The 1996 Act contemplates a merger of the SAIF and BIF funds, with the
elimination of the federal savings bank charter by January 1, 1999. The exact
manner in which the elimination will be accomplished has not yet been
established, but commentators have suggested that all federal thrift
institutions, such as the Association, will be required to convert either to a
national bank, state commercial bank or state savings bank charter. A change in
the charter of the Association could also affect the flexibility accorded to the
Company as a unitary savings and loan holding company. The effect that the
forced conversion will have on the Association and the Company cannot be
determined at this time and there can be no assurance that a charter conversion
will not have an adverse impact on the Company or the Association.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose limits on dividends or other capital distributions by
savings institutions based on capital levels and net income. An institution,
such as the Association, that meets or exceeds all of its capital requirements
(both before and after giving effect to the distribution) and is not in need of
more than normal supervision, may make capital distributions during a calendar
year of up to the greater of (i) 100% of net income for the current calendar
year plus 50% of its capital surplus (capital in excess of regulatory
requirements) or (ii) 75% of its net income over the most recent four quarters.
Any additional capital distributions require prior regulatory approval.
The Association's capital levels exceed regulatory minimums to such an extent
that the substantive restrictions on dividends are not expected to have a
material effect on the Association. However, OTS regulations also impose
procedural restrictions. The OTS must receive at least 30 days' written notice
before making any capital distributions. All such capital distributions are
subject to the OTS' right to object to a distribution on safety and soundness
grounds. The OTS has proposed regulations that would eliminate the notice
requirement for the highest rated institutions so that advance notice would not
be required for most normal dividends. The Association expects that it will not
be required to give notice under normal circumstances if the new proposal is
adopted in its current form.
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Qualified Thrift Lenders
A savings association will be a QTL if its qualified thrift investments equal or
exceed 65% of its portfolio assets on a monthly average basis in nine of every
12 months. Qualified thrift investments include, among others, (i) certain
housing-related loans and investments (notably including residential one-to-four
family mortgage loans), (ii) certain federal government and agency obligations,
(iii) loans to purchase or construct churches, schools, nursing homes and
hospitals (subject to certain limitations), (iv) shares of stock issued by any
Federal Home Loan Bank, and (vi) shares of stock issue by the FHLMC or the FNMA
(subject to certain limitations). At September 30, 1998, the Association
satisfied the QTL test.
If the Association fails to remain a QTL, it must either convert to a national
bank charter or be subject to restrictions on its activities specified by law
and the OTS regulations, which restrictions would generally limit activities to
those permitted for national banks. Also, three years after the savings
institution ceases to be a QTL, it would be prohibited from retaining any
investment or engaging in any activity not permissible for a national bank and
would be required to repay any outstanding borrowings from any Federal Home Loan
Bank.
Community Reinvestment Act
Under the Community Reinvestment Act (the "CRA"), as implemented by OTS
regulations, the Association has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The
Association is periodically examined by the OTS for compliance with the CRA.
Subject to certain exceptions and elections, the Association's CRA performance
will be evaluated based upon the lending, investment and service activities of
the Association. In the last CRA examination performed by the OTS, the
Association received a rating of satisfactory.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
The Association was in compliance with the reserve requirements at September 30,
1998.
Savings associations are authorized to borrow from the Federal Reserve
Association "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Association.
Taxation
The Company pays federal and New York State income taxes on its income. The
Holding Company will file a consolidated income tax return with the Association
for the taxable year ending December 31, 1998. As a Delaware holding company,
the Holding Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual fee to the State of
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Delaware. The Holding Company is also subject to an annual franchise tax imposed
by the State of Delaware.
Market Area
The Association conducts business through its main office located at 52 North
Main Street, Gloversville, New York and a branch office located at 295 Broadway,
Saratoga Springs, New York. The Association's market area for deposits consists
primarily of Fulton and Saratoga Counties. The Association's primary market area
for lending activities consist of communities within Fulton and Saratoga
Counties, as well as portions of Hamilton and Montgomery Counties, New York.
Gloversville, New York is located in Fulton County approximately 50 miles
Northwest of Albany, New York. Gloversville and the surrounding communities
include a population of low- and moderate-income neighborhoods. Gloversville has
undergone significant economic hardships as the major leather industries that
were once the focal point of industrial strength for the region have relocated
to other parts of the world. Gloversville, with its neighboring city Johnstown,
have recently experienced some revitalization as a number of manufacturing
entities have opened manufacturing plants in the area, capitalizing on the
region's lower labor and operating costs. The housing in the Gloversville area
consists mainly of one-to-four family residences within the city limits. Outside
Gloversville, in the rural areas leading into the Adirondack Mountains, there
are many nonconforming properties which are generally used as summer homes and
camps. Real estate values in these areas have experienced a steady decline in
recent years.
Saratoga Springs, New York is located in Saratoga County approximately 40 miles
North of Albany, New York. Saratoga Springs and the surrounding communities
include a diverse population of low income neighborhoods, as well as middle
class and more affluent neighborhoods. The housing market has been very strong
in the Saratoga County and expectations are that the trend will continue. This
part of the Association's market also includes substantial commercial areas
supporting small to large manufacturing, industrial and professional service
companies.
Lending Activities
Historically, the Association originated 30-year, fixed-rate mortgage loans
secured by one-to-four family residences. In fiscal 1995, the Association began
to diversify its portfolio by more actively originating multi-family and
commercial real estate loans and commercial business loans; however, subsequent
to the end of fiscal 1998, the Board determined to reduce its origination of
such loans. Currently, all loans originated by the Association are held to
maturity as portfolio loans. At September 30, 1998, the Association's gross loan
portfolio totaled $51.8 million.
Pursuant to Federal law the aggregate amount of loans that the Association is
permitted to make to any one borrower or a group of related borrowers is
generally limited to 15% of unimpaired capital and surplus. At September 30,
1998, based on the above, the Association's loans-to-one borrower limit was
approximately $1.6 million. On the same date, the Association had no borrowers
with balances in excess of this amount. As of September 30, 1998, the largest
dollar amount outstanding to one borrower, or group of related borrowers, was
$528,000 and was secured by commercial real estate and building located in
Saratoga County. This loan was performing in accordance with its terms at
September 30, 1998, and the Association has obtained personal guarantees (or
direct personal liability) form the principals on this loan. As of September 30,
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1998, there were 11 other multi-family and commercial real estate or commercial
business loans with carrying values in excess of $300,000. See also
"Multi-family and Commercial Real Estate Lending."
The Association's lending is subject to its written underwriting standards and
to loan origination procedures. Decisions on loan applications are made on the
basis of detailed applications and property valuations (consistent with the
Association's appraisal policy) by the Association's independent appraisers. The
loan applications are designed primarily to determine the borrower's ability to
repay and the more significant items on the application are verified through use
of credit reports, financial statements, tax returns and/or confirmations.
Association employees with lending authority are designated, and their lending
limit authority defined, by the Board of Directors of the Association. The
lending authority limits are applied based on aggregate loan balances due the
Association, including any pending loan requests. The approval of the
Association's Board of Directors is required for any loans where the aggregate
borrowings of the subject entity or individual exceed $250,000. Loan Committee
approval is required for all loans where the aggregate borrowings of the subject
entity or individual exceed $150,000 but are less than $250,000. The Loan
Committee includes the President, the Vice President of Commercial Lending, two
outside Board members and two other Association officers.
For multi-family and commercial real estate and commercial business loans, the
President and Vice President of Commercial Lending has the authority to approve
secured loans up to $100,000 and unsecured loans up to $50,000. Joint approval
by the President and Vice President of Commercial Lending is required for
multi-family and commercial real estate and commercial business loans greater
than $100,000 ($50,000 for unsecured loans) but not exceeding $150,000.
The President or the Vice President of Commercial Lending have the authority to
approve residential mortgages up to $150,000. The President also has the
authority to approve secured consumer loans up to $150,000 and unsecured
consumer loans up to $50,000. The Vice President of Commercial Lending has the
authority to approve secured consumer loans up to $50,000 and unsecured consumer
loans up to $10,000.
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The following table sets forth the composition of the Association's loan
portfolio by loan type at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- -------------- ----------------- --------------- ----------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
One-to-four family $35,706 68.91% $36,891 71.92% $40,262 78.80% $42,578 86.41% $42,973 91.89%
Multi-family and commercial 8,614 16.62% 7,950 15.50% 4,635 9.07% 1,712 3.47% 878 1.88%
Construction 606 1.17% 539 1.05% 938 1.84% 742 1.51% 701 1.50%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans: 44,926 86.70% 45,380 88.47% 45,835 89.71% 45,032 91.39% 44,552 95.27%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Other Loans:
- ------------
Commercial business 2,624 5.06% 1,422 2.77% 1,230 2.41% 1,052 2.14% -- --
Home equity 3,143 6.07% 3,379 6.59% 2,869 5.62% 2,265 4.60% 1,352 2.89%
Other consumer 1,122 2.17% 1,111 2.17% 1,154 2.26% 920 1.87% 861 1.84%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total other loans 6,889 13.30% 5,912 11.53% 5,253 10.29% 4,237 8.61% 2,213 4.73%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross loans 51,815 100.00% 51,292 100.00% 51,088 100.00% 49,269 100.00% 46,765 100.00%
====== ====== ====== ====== ======
Less:
- -----
Net deferred loan fees (118) (153) (201) (251) (264)
Allowance for loan losses (1,496) (1,613) (1,251) (779) (856)
------ ------- ------ ------ -----
Total loans receivable, net $ 50,201 $ 49,526 $ 49,636 $ 48,239 $ 45,645
======== ======== ======== ======== ========
</TABLE>
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The following table presents the composition of the Association's loan portfolio
by fixed and adjustable rate at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- -------------- ----------------- --------------- ----------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans
- ----------------
Real estate:
One-to-four family $ 31,539 60.86% $ 31,732 61.86% $ 34,929 68.37% $ 37,356 75.82% $ 39,632 84.75%
Multi-family and commercial 884 1.71% 1,206 2.35% 924 1.81% 1,527 3.10% 878 1.88%
Construction 606 1.17% 392 0.76% 423 0.83% 293 0.59% 485 1.04%
--------- -------- --------------------------- --------- ---------- -------- --------- --------
Total real estate loans 33,029 63.74% 33,330 64.97% 36,276 71.01% 39,176 79.51% 40,995 87.67%
Commercial business 703 1.36% 283 0.55% 23 0.05% - - - -
Home equity 1,331 2.57% 1,244 2.43% 645 1.26% 14 0.03% - -
Other consumer 1,046 2.02% 1,056 2.06% 1,058 2.07% 916 1.86% 861 1.84%
-------- ------- -------- -------- -------- -------- --------- ------- -------- -------
Total fixed rate loans 36,109 69.69% 35,913 70.01% 38,002 74.39% 40,106 81.40% 41,856 89.51%
Adjustable Rate Loans
- ---------------------
Real estate:
One-to-four family 4,167 8.04% 5,159 10.06% 5,333 10.44% 5,222 10.60% 3,341 7.14%
Multi-family and commercial 7,730 14.92% 6,744 13.15% 3,711 7.26% 1,052 2.14% - -
Construction - 0.00% 147 0.29% 515 1.01% 449 0.91% 216 0.46%
--------- -------- -------- ------- ------- --------- -------- ------- ------- -------
Total real estate loans 11,897 22.96% 12,050 23.50% 9,559 18.71% 6,723 13.65% 3,557 7.60%
Commercial business 1,921 3.71% 1,139 2.22% 1,207 2.36% 185 0.38% - -
Home equity 1,812 3.50% 2,135 4.16% 2,224 4.35% 2,251 4.56% 1,352 2.89%
Other consumer 76 0.14% 55 0.11% 96 0.19% 4 0.01% - -
--------- -------- --------- ------ -------- --------- -------- ------- ------- -------
Total adjustable rate loans 15,706 30.31% 15,379 29.99% 13,086 25.61% 9,163 18.60% 4,909 10.49%
Gross loans 51,815 100.00% 51,292 100.00% 51,088 100.00% 49,269 100.00% 46,765 100.00%
====== ====== ====== ====== ======
Less
- ----
Net deferred loan fees (118) (153) (201) (251) (264)
Allowance for loan losses (1,496) (1,613) (1,251) (779) (856)
--------- ------ ------- -------- ------
Total loans receivable, net $ 50,201 $ 49,526 $ 49,636 $ 48,239 $ 45,645
======== ======== ======== ======== ========
</TABLE>
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The following schedule illustrates the interest rate sensitivity of the
Association's loan portfolio at September 30, 1998. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contracts are due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
----------------------------------------------------------
Multi-family and Home Equity and
One-to-four family Commercial Construction Commercial Business Other Consumer
-------------------- ------------------ ---------------- -------------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- -------- ------- ------- ------ ------ ------- ----- ------
(Dollars in Thousands)
Due During
Years Ending
September 30,
- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $ 374 7.04% $ 139 10.16% $ 606 7.38% $ 835 9.52% $ 233 7.32%
2000 91 9.30% - - - - - - 111 10.47%
2001 265 8.50% - - - - 219 10.25% 283 9.86%
2002 and 2003 1,041 8.70% - - - - 819 9.57% 295 9.38%
2004 and 2008 6,413 8.23% 2,391 9.78% - - 716 9.59% 511 8.61%
2009 to 2023 16,998 8.34% 6,084 9.51% - - 13 10.50% 2,832 9.21%
2024 and following 10,524 7.92% - - - - 22 11.02% - -
--------- -------- ------ -------- --------
Total $ 35,706 $ 8,614 $ 606 $ 2,624 $ 4,265
========= ======== ====== ======== ========
</TABLE>
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One-to-four Family Residential Real Estate Lending
The cornerstone of the Association's lending program has historically been the
origination of loans secured by mortgages on owner-occupied one-to-four family
residences at both fixed and adjustable rates. At September 30, 1998, $35.7
million, or 68.9%, of the Association's loan portfolio consisted of mortgage
loans on one-to-four family residences. Substantially all of the residential
loans originated by the Association are secured by properties located in the
AssociationOs primary lending area. All loans originated by the Association are
retained and serviced by it.
The Association offers conventional fixed-rate loans with maximum terms of up to
30 years. The interest rate on these loans are established on a regular basis
according to market conditions. The Association underwrites its fixed-rate
one-to-four family loans in accordance with Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")
standards. As of September 30, 1998, the Association had $31.5 million of fixed
rate loans secured by one-to-four family residential properties. During fiscal
1998, the Association began originating fixed-rate Federal Home Authority
("FHA") guaranteed loans. These loans are underwritten based on standards
established by FHA which are generally less stringent than conventional
guidelines. These loans carry the guarantee of the FHA if the customer defaults
on the loan, provided the Association complies with all collection procedures
established by the FHA. At September 30, 1998, the Association had $908,000 in
FHA loans outstanding.
The Association also offers ARMs which carry interest rates which adjust
annually at a margin (generally 275 basis points) over the yield on the One Year
Average Monthly U.S. Treasury Constant Maturity Index ("one year CMT"). Such
loans may carry terms to maturity of up to 30 years. The ARM loans currently
offered by the Association provide for up to 200 basis point annual interest
rate change cap and a lifetime cap generally 600 basis points over the initial
rate. Initial interest rates offered on the Association's ARMs may be 100 to 350
basis points below the fully indexed rate, although borrowers are generally
qualified at the fully indexed rate. As a result, the risk of default on these
loans may increase as interest rates increase. In addition, the Association's
ARMs typically do not adjust below the initial rate. At September 30, 1998,
one-to-four family ARMs totaled $4.2 million or 8.0% of the Association's total
loan portfolio.
The Association also originates loans secured by non-conforming second homes and
vacation homes. The rates charged for these loans are generally at higher rates
than those offered for conventional one-to-four family loans. Generally, the
same underwriting criteria is used when evaluating applications made for
mortgages on second homes and vacation homes as used for applications taken for
mortgages on one-to-four family residences.
The Association will generally lend up to 97% of the lesser of the sales price
or appraised value of the security property on owner occupied one-to-four family
loans. For loans exceeding an 80% loan-to-value ratio, the Association requires
private mortgage insurance in amounts intended to reduce the Association's
exposure to 80% or less. Borrowers are required to purchase the mortgage
insurance protection provided by the FHA for FHA mortgages where loan-to-value
ratios exceed 80%. The maximum loan-to-value ratio for non-owner occupied
one-to-four family residences that are non-owner occupied is 75% (65% where
there is a cash out refinancing). For mortgages on second homes and vacation
homes, the loan-to-value ratio cannot exceed 80% for one-family residences and
75% for two-to-four family residences. Mortgages on non-owner occupied second
homes and vacation homes cannot exceed 70% loan-to-value, and non-owner occupied
cash out refinances for non-conforming second homes and vacation homes cannot
exceed 50% loan-to-value.
13
<PAGE>
In underwriting one-to-four family residential real estate loans, the
Association currently evaluates the borrower's ability to make principal,
interest and escrow payments, and the value of the property that will secure the
loan.
Residential loans do not currently include prepayment penalties, are
non-assumable and do not produce negative amortization. Although the Association
currently originates mortgage loans only for its portfolio, the Association's
loans are now generally underwritten according to secondary market standards.
While the Association seeks to originate most of its one-to-four family
residential loans in amounts which are less than or equal to the applicable
FHLMC maximum, the Association may, on an exception basis, make one-to-four
family residential loans in amounts in excess of such maximum.
The Association's residential mortgage loans customarily include due-on-sale
clauses giving the Association the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage.
Multi-family and Commercial Real Estate Lending
In order to increase the yield on its loan portfolio and to complement the
residential lending opportunities, since fiscal 1995, the Association has
significantly increased it originations of permanent multi-family and commercial
real estate loans secured by properties in its primary market area; however,
subsequent to the end of fiscal 1998, as a result of an increase in
nonperforming commercial real estate loans, the Board determined to reduce the
Association's originations of such loans. At September 30, 1998, the Association
had $8.6 million in multi-family and commercial real estate loans, representing
16.6% of the gross loan portfolio.
The Association's multi-family and commercial real estate loan portfolio
includes loans secured by apartment buildings, office buildings, warehouses and
other income producing properties located in its market area. In addition, at
September 30, 1998, the Association had $139,000 of commercial construction
loans.
The Association's multi-family and commercial real estate loans generally carry
a maximum term of 20 years and, more often than not, have interest rates which
are fixed for three to five years and adjust periodically thereafter.
The Association's multi-family and commercial real estate loans are generally
made in amounts up to 75% of the lesser of the appraised value or the purchase
price of the property, with a projected debt service coverage ratio of at least
120%. The Association's current multi-family and commercial real estate loan
originations generally include operating covenants requiring the borrower to
maintain specified debt coverage, liquidity and other ratios, although most
multi-family and commercial real estate loans originated in years prior to
fiscal 1995 did not have such operating covenants, which could reduce the
Association's leverage in the event of delinquency.
Appraisals on properties securing multi-family and commercial real estate loans
are performed by independent appraisers designated by the Association at the
time the loan is made. All appraisals on multi-family and commercial real estate
loans are reviewed by the Association's management. In addition, the
Association's underwriting procedures require verification of the borrower's
credit history, income and financial statements, banking relationships,
references and income projections for the property. Where feasible, the
14
<PAGE>
Association seeks to obtain personal guarantees on these loans and key man life
insurance on individuals critical to the success of the borrower's business.
Set forth below is a summary of the Association's multi-family and commercial
real estate loans which had an outstanding principal balance in excess of
$300,000 at September 30, 1998:
<TABLE>
<CAPTION>
Date of Collateral Maturity Personal Balance at
Origination Description Loan Terms Date Guarantee September 30, 1998 Status
- ----------- ----------- ---------- --------- --------- ------------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
July 1996 Warehouse located in Interest rate July 2016 Yes 528,439 Current; $250,000 SBA second
Saratoga County. adjusts every lien on same collateral.
five years.
July 1996 Office building Interest rate April 2017 Yes 517,161 Current; "Of concern" as
located in adjusts every retail business of
Saratoga County. year. borrower not meeting
projections; building
fully occupied with
assignment of leases to
Association.
June 1997 Land located in Albany Interest rate June 2007 Yes 441,507 Current; $760,000
County. adjusts every mortgage on building
year. subordinated to
Association loan; direct
assignment of monthly
rental income, which is
double amount required
for debt service.
July 1995 Trooper barracks in Interest rate August 2010 Yes 421,091 Current; loan represents
Saratoga County and adjusts every a refinance of subject
12 unit residential five years. properties to fund new
complex in Saratoga venture which is not
County subject to the
Association's lien.
June 1997 Warehouse/office Interest rate October 2007 Yes 411,000 Nonaccrual at September
located in Saratoga adjusts every 30, 1998; substandard
County and three years. classification; property
warehouse/office in obtained by Association
Albany County through deed-in-lieu of
foreclosure October 1998.
June 1997 Newly renovated takeout Interest rate November 2017 Yes 389,195 Current; substandard
restaurant in adjusts every classification due to
Saratoga County year. poor cash flow and high
LTV; foreclosure process
begun December 1998.
April 1996 3-story, 16 unit Interest rate May 2016 Yes 381,994 Current; 100% occupancy
apartment complex adjusts every at September 30, 1998.
in Saratoga County five years.
October 1996 Restaurant/marina Interest rate October 2008 Yes 358,187 Current; borrower
located in Fulton adjusts every prepaying principal;
County five years. exclusive location on
major lake.
October 1996 39 unit adult home Interest rate December 2016 Yes 341,684 Current; 95% occupancy at
in Saratoga County adjusts every February 28, 1998.
two years.
April 1994 Three residential Interest rate May 2009 Yes 322,105 Current; 100% occupancy
rental units located is fixed. at September 30, 1998.
in Saratoga County
</TABLE>
15
<PAGE>
Multi-family and commercial real estate loans are generally believed to present
a higher level of risk than loans secured by one-to-four family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or renewed), the
borrower's ability to repay the loan may be impaired. In addition, the
Association's multi-family and commercial real estate loans, particularly those
originated when the Association first expanded this product line, may be subject
to additional risks related to the Association's relative inexperience with this
type of lending (including the absence of tested procedures with respect
thereto). The Association's portfolio is relatively unseasoned and no assurance
can be given that the Association will not experience losses or unsatisfactory
results on it. As a result of the above as well as financial concerns with
respect to the borrowers, the Association rated $641,000 of its multi-family and
commercial real estate loans as "of concern" at September 30, 1998. In addition,
there were $896,000 in nonperforming multi-family and commercial real estate
loans at September 30, 1998.
Construction
The Association offers residential single family construction loans to persons
who intend to occupy the property upon completion of construction. Upon
completion of construction, these loans are automatically converted into
permanent residential mortgage loans and classified as such. The proceeds of the
construction loan are advanced in stages on a percentage of completion basis as
construction progresses. The loans generally provide for a construction period
of not more than twelve months during which the borrower pays interest only. In
recognition of the risks involved with such loans, the Association carefully
monitors construction through regular inspections and the borrower must qualify
for the permanent mortgage loan before the construction loan is made. At
September 30, 1998, the Association had $606,000 in construction loans
outstanding, or 1.2% of gross loans. There are no nonperforming construction
loans at September 30, 1998.
Construction lending is generally considered to involve a higher level of credit
risk than permanent one-to-four family residential lending. The nature of these
loans is such that they are more difficult to evaluate and monitor. The
Association's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value upon completion of the
project and the essential cost (including interest) of the project. If the cost
estimate proves to be inaccurate, the Association may be required to advance
funds beyond the amount originally committed in order to permit completion of
the project.
Commercial Business
Subject to the restrictions contained in federal laws and regulations, the
Association is authorized to make secured or unsecured commercial business
loans. At September 30, 1998, $2.6 million, or 5.1%, of the Association's total
loan portfolio consisted of commercial business loans. The Association has
recently increased its commercial business loans to qualified borrowers as part
of its policy of servicing customers and consolidating banking relationships,
and also to further its market risk analysis goals; however, subsequent to the
end of fiscal 1998, the Board determined to reduce its originations of
commercial business loans.
16
<PAGE>
The commercial business loans are generally structured as short-term time notes
and term loans. Time notes generally have terms of less than one year to
accommodate seasonal peaks and valleys in the borrower's business cycle.
Commercial business term loans generally have terms of ten years or less and,
more often than not, have adjustable interest rates.
The Association's commercial business loans generally are secured by equipment,
machinery or other corporate assets including real estate and inventory. Like
the multi-family and commercial real estate loans discussed above, the
Association's current commercial business loan originations generally have
covenants requiring the borrowers to maintain certain financial ratios, although
many loans originated prior to fiscal 1995 do not have such covenants, which
could reduce the Association's leverage in the event of a credit deterioration.
In addition, the Association generally obtains personal guarantees from the
principals of the borrower with respect to all commercial business loans.
Generally, the Association's commercial business lending has been limited to
borrowers headquartered, or doing business, in the Association's market area.
Unlike residential mortgage loans, which are generally made on the basis of the
borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself, which in turn may be dependent on the local
economy, which is currently not performing at a high level. Further, the
collateral securing the loans, if any, may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the
business. In addition, commercial business lending generally requires
substantially greater oversight efforts compared to residential real estate
lending. Finally, the Association's relative inexperience with this type of
lending (including the relatively untested nature of its new procedures related
to this type of lending) may be deemed to add to the risks of this type of
lending. At September 30, 1998, $6,000 in commercial business loans were
classified as nonperforming, and $18,000 were rated "of concern."
Set forth below is a description of the Association's only commercial business
loan which had an outstanding principal balance in excess of $300,000 at
September 30, 1998:
<TABLE>
<CAPTION>
Date of Collateral Maturity Personal Balance at
Origination Description Loan Terms Date Guarantee September 30, 1998 Status
----------- ----------- ---------- -------- --------- ------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
May 1997 11 fully equipped Interest adjusts November 1998 Yes 418,251 Current; insurance on
1998/99 29-foot daily based on vehicles with Association
Recreational established as beneficiary; quarterly
vehicles index inspections performed on
collateral by
Association; loan renewed
with new maturity of
December 1999.
</TABLE>
Home Equity Loans and Lines
Home equity loans are secured by second mortgages on one-to-four family
owner-occupied residences. These loans are of two types. The Association's home
equity loans are written so that the total commitment amount, when combined with
the balance of the first mortgage lien, may not exceed 80% of the appraised
17
<PAGE>
value of the property or $50,000. These loans are written with fixed terms of up
to 15 years and carry fixed interest rates. Home equity lines of credit
("HELOCs") are written so that the total commitment amount, when combined with
the balance of the first mortgage lien, may not exceed 80% of the appraised
value of the property, with a maximum of $100,000. HELOCs are written for terms
up to 25 years (with the first 5 year period requiring only interest payments
and the last 20 year period being fully amortized) and carry a prime-based
floating rate of interest after the first year. At September 30, 1998, the
Association's home equity loans and HELOCs totaled $3.1 million or 6.1% of the
gross loans outstanding. At September 30, 1998, $30,000 in home equity loans are
nonperforming.
Consumer Lending
Management believes that offering consumer loan products helps to expand the
Association's customer base and to create stronger ties to its existing customer
base. In addition, because consumer loans generally have shorter terms to
maturity and carry higher rates of interest than do residential mortgage loans,
they can be valuable market risk analysis tools. The Association originates a
variety of different types of consumer loans, including automobile, mobile home
and deposit account loans for household and personal purposes. At September 30,
1998, consumer loans totaled $1.1 million or 2.2% of total loans outstanding.
Consumer loan terms vary according to the type and value of collateral, length
of contract and credit worthiness of the borrower. The Association's consumer
loans are made with fixed or adjustable interest rates, with terms of up to 25
years.
The underwriting standards employed by the Association for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
credit worthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. Consumer loans may entail greater credit
risk than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or are secured by rapidly depreciable assets, such as
automobiles. In such cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation.
In addition, consumer loan collections are dependent on the borrower's
continuing financial stability, and thus are more likely to be affected by
adverse personal circumstances. Furthermore, the application of various federal
and state laws, including bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans.
At September 30, 1998, there were no nonperforming consumer loans.
Origination of Loans
The lending activities of the Association are subject to the written,
non-discriminatory, underwriting standards and loan origination procedures
established by the Association's Board of Directors and management. Loan
originations come from a number of sources. Residential loan originations can be
attributed to depositors, retail customers, telephone inquiries, advertising,
the efforts of the Association's loan officers and referrals from other
borrowers, real estate brokers and builders. The Association originates loans
through its own efforts and does not compensate mortgage brokers, mortgage
bankers or other loan finders. However, the Association frequently obtains
multi-family and commercial real estate and commercial business loans through
commercial loan brokers paid by the borrower. Beginning in fiscal 1998, an
Association employee was assigned the task of solely originating residential
mortgages and home equity loans.
18
<PAGE>
All loans held in portfolio at September 30, 1998 were originated by the
Association. The Association does not purchase whole loans. There have been no
loan sales made by the Association, and it is the Association's intention that
all loans originated be held in portfolio until maturity. Management may
consider selling loans in the future depending on market conditions and the
asset/liability management requirements of the Association.
While the Association originates both fixed and adjustable rate loans, its
ability to originate loans is dependent upon the relative customer demand for
loans in its market. Demand is affected by the local economy and the interest
rate environment. From time to time, in order to supplement loan demand in the
Association's market area, the Association has acquired mortgage-backed
securities which are held in the "available for sale" portfolio. See
"-Investment Activities - Mortgage-Backed Securities."
The following table shows the loan origination and repayment activities of the
Association for the periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1998 1997 1996
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Fixed rate:
- -----------
Real estate: One- to four-family $4,989 $1,577 $2,140
Multi-family and commercial 428 978 955
One-to four-family construction 1,472 683 428
Non-real estate: Commercial business 135 436 76
Home equity 331 215 865
Other consumer 584 348 449
------------ ------------ ------------
Total fixed rate 7,939 4,237 4,913
------------ ------------ ------------
Adjustable rate:
- ----------------
Real estate: One- to four-family - 24 243
Multi-family and commercial 1,742 3,115 1,795
One-to four-family construction - 40 125
Non-real estate: Commercial business 890 456 1,078
Home equity 275 773 530
Other consumer 40 206 97
------------ ------------ ------------
Total adjustable rate 2,947 4,614 3,868
------------ ------------ ------------
Total loans originated 10,886 8,851 8,781
Principal repayments (9,146) (7,670) (6,173)
Decrease in other terms, net (1,217) (977) (552)
============ ============ ============
Net increase $ 523 $ 204 $2,056
============ ============ ============
</TABLE>
19
<PAGE>
Asset Quality
Delinquency Procedures. When a borrower fails to make a required payment on a
loan, the Association attempts to cause the deficiency to be cured by contacting
the borrower. Late notices are generally sent when a payment on a residential or
consumer loan is more than 15 days past due and a late charge is generally
assessed at that time. For multi-family and commercial real estate loans and
commercial business loans, the Association sends a late notice on the 11th day
after payment is due, and a late fee is assessed at that time. For residential
and consumer loans, the Association's asset review officer attempts to contact
personally any borrower who is more than 30 days past due. For multi-family and
commercial real estate and commercial business loans, the Vice President
Commercial Loans telephones the borrower when payment is 15 days delinquent. For
all loans past due 60 days or more principal and interest, and, beginning in
July 1997, all loans where the borrower is delinquent in the payment of real
estate taxes regardless of payment status, the asset review officer or the Vice
President - Commercial Loans contacts the borrower on a regular basis to seek to
cure the delinquency. If a loan becomes past due 90 days, the Association refers
the matter to an attorney, who first seeks to obtain payment without litigation
and, if unsuccessful, generally commences a foreclosure action or other
appropriate legal action to collect the loan. The Association also seeks to
recover any shortfall by pursuing the borrower on the note. A foreclosure
action, if the default is not cured, typically leads to a judicial sale of the
mortgaged real estate. The judicial sale is normally delayed if the borrower
files a bankruptcy petition because the foreclosure action cannot be continued
unless the Association first obtains relief from the automatic stay provided by
the Bankruptcy Code.
If the Association acquires the mortgaged property at foreclosure sale or
accepts a voluntary deed in lieu of foreclosure, the acquired property is then
classified as Other Real Estate Owned ("OREO") until it is sold. When OREO is
acquired, the property is recorded at the lower of cost (defined as fair value
of the foreclosed property at initial foreclosure) or fair value of the asset
acquired less estimated costs to sell the property. The shortfall (if any)
between the fair value of the property and the carrying value of the loan is
charged to the allowance for loan losses. The Association also seeks to recover
any shortfall by pursuing the borrower on the note. Thereafter, changes in the
value of the OREO are taken as current expenses.
The Association is permitted to finance sales of OREO by "loans to facilitate,"
which may involve a lower down payment or a longer repayment term or other more
favorable features than generally would be granted under the Association's
underwriting guidelines. At September 30, 1998, there was one "loan to
facilitate" outstanding for $128,000 which was classified as substandard and
non-accruing at September 30, 1998, as the borrower was more than 90 days
delinquent as to payments. The "loan to facilitate" was originated December 1993
and has been classified as substandard since that time.
It is the Association's policy to discontinue accruing interest on a loan when
it becomes 90 days or more delinquent, regardless of the collateral supporting
the loan or sooner if management believes it is prudent to do so. Once the
accrual of interest is discontinued, the Association generally records interest
as and when received until the loan is restored to accruing status. The loan
remains on nonaccrual until such time that the borrower has repaid all
delinquency and has maintained the loan in a current status for at least three
consecutive months, provided management concludes that full payment of principal
and interest is reasonably assured in the future.
20
<PAGE>
The following table sets forth the Company's loan delinquencies as to principal
and interest payments by type, by number, amount and by percentage of type at
September 30, 1998.
<TABLE>
<CAPTION>
Loan Delinquencies at September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
------------------------------ ----------------------------------- ---------------------------------
% of % of % of
Number Amount Category Number Amount Category Number Amount Category
-------- --------- -------- -------- -------- ---------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
- ------------
Multi-family and commercial - - - 1 411 4.77% 1 411 4.77%
One-to-four family - - - 7 326 0.91% 7 326 0.91%
===== ======= ========= ====== ======= ========
Total - $ - - 8 $ 737 1.42% 8 $ 737 1.42%
===== ======= ========= ====== ======= ========
</TABLE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. The Association classifies all of its loans monthly based on
delinquency status. Multi-family and commercial real estate and commercial
business loans are reviewed annually regardless of delinquency status. There are
three classifications for problem assets: Substandard, Doubtful and Loss.
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the Association will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss allowance. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS. As of September 30, 1998, the Association had $1.8 million
of loans classified as substandard. At that time, the Association also had
$142,000 of loans classified as "special mention." As of the same date, the
Association had no assets classified as doubtful or loss.
21
<PAGE>
Nonperforming assets. The table below sets forth the amounts and categories of
the Association's nonperforming assets. Foreclosed assets include assets
acquired in settlement of loans.
<TABLE>
<CAPTION>
Non-Performing Assets
At September 30,
--------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family(1) $ 894 $3,730 $2,212 $2,576 $3,438
Multi-family and commercial 896 -- -- -- --
Commercial business 6 -- -- -- --
Home equity(2) 30 63 -- -- --
Other consumer -- -- -- 5 80
------ ------ ------ ------ ------
Total non-performing loans(3) 1,826 3,793 2,212 2,581 3,518
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family 256 313 70 182 334
------ ------ ------ ------ ------
Total non-performing assets $2,082 $4,106 $2,282 $2,763 $3,852
====== ====== ====== ====== ======
Total non-performing assets
as a percentage of total assets 3.05% 6.73% 3.74% 4.38% 5.53%
====== ====== ====== ====== ======
Allowance as a percentage of
non-performing loans (end of period) 81.91% 42.53% 56.53% 30.20% 24.34%
====== ====== ====== ====== ======
</TABLE>
(1) Includes $535,000 and $1,598,000 of nonaccruing, restructured loans at
September 30, 1998 and 1997, respectively.
(2) Includes $15,000 of restructured loans that are also non-accruing loans at
September 30, 1998.
(3) There are no loans past due greater than 90 days and accruing interest or
restructured loans accruing interest.
For the year ended September 30, 1998, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $174,000. The amount that was included in interest
income on such loans was $143,000.
At September 30, 1998, the Association's nonperforming loans consisted of 17
loans secured by one-to-four family residences totaling $924,000 (two of these
loans were secured solely by second mortgages while the remaining 15 loans were
secured, at a minimum, by a first mortgage on the collateral), three loans
secured by commercial real estate totaling $896,000 and two unsecured commercial
business loans totaling $6,000. At September 30, 1998, there were four
one-to-four family properties held as OREO with a net carrying value of
$256,000. Three of these OREO properties were either sold or under contract for
sale by December 31, 1998 without material loss.
In fiscal 1998 and 1997, the Association noted delinquent real estate taxes on a
number of loans which were not previously classified as nonperforming. The
Association contacted all of the borrowers of such loans and, in cases where the
taxes were not promptly paid by the borrower, advanced funds for the payment of
the taxes and rewrote such loans to add the advanced funds to the loan principal
and to include tax escrow provisions. Such rewritten loans were classified as
troubled debt restructurings where deemed appropriate based on the financial
position of the borrower. As of September 30, 1998, the Association's troubled
debt restructurings were $550,000. While all such loans were classified as
nonperforming at September 30, 1998, none were 90 days or more delinquent as of
such date. Since these loans were written at market interest rates, it is
anticipated that, provided that these loans continue to perform in accordance
22
<PAGE>
with their new terms, they will become performing loans, generally after one
year of performance. All current originations by the Association provide for tax
escrows.
Other Loans of Concern. In addition to the nonperforming assets set forth in the
table above, as of September 30, 1998, there were $659,000 of other loans, all
of which were multi-family and commercial real estate or commercial business
loans, with respect to which known information about the possible credit
problems of the borrowers or the cash flows of the security pro perties
have caused management to have concerns as to the ability of the borrowers to
comply with present loan repayment terms and which may result in the future
inclusion of such items in the nonperforming asset categories. While none of
these loans were 60 days or more delinquent as of the date hereof, weak or
negative cash flows, failure to attain budgeted income projections or declines
in collateral values have been the primary reasons which have caused the
Association to monitor such loans more carefully.
The largest other loan of concern is a $517,000 commercial real estate loan
secured by an office building located in Saratoga County. Although this loan has
experienced no delinquency greater than 60 days since origination in July 1996,
the Association has classified it as "of concern" because the borrower's
business, which commenced operations in March 1997 and occupies a major portion
of the property, is not meeting financial projections. The loan is guaranteed by
the business principals and was current at September 30, 1998.
Other loans of concern at September 30, 1998 consisted of three multi-family and
commercial real estate loans totaling $142,000 and one commercial business loan
totaling $18,000. All other loans of concern were less than 60 days delinquent
at September 30, 1998 but were classified because of lower than expected debt
service coverage. The Association's loans of concern have been considered by
management in conjunction with the analysis of the adequacy of the allowance for
loan losses.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to earnings based on the Association's evaluation of the risks inherent
in its entire loan portfolio. Such evaluation, which includes a review of all
loans for which full collectibility may not be reasonably assured, considers the
market value of the underlying collateral, growth and composition of the loan
portfolio, delinquency trends, adverse situations that may affect the borrower's
ability to repay, prevailing and projected economic conditions and other factors
that warrant recognition in providing for an adequate allowance for loan losses.
Management believes its allowance for loan losses is adequate at September 30,
1998. While the Association believes that it uses the best information available
to determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination.
23
<PAGE>
The following table sets forth an analysis of the Association's allowance loan
losses:
<TABLE>
<CAPTION>
Allowance for Loan Loss Analysis
Years Ended September 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ------------ ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,613 $ 1,251 $ 779 $ 856 $ 875
Charge-offs:
One- to four-family (258) (417) (218) (160) (115)
Commercial business (24) (7) (4) -- --
Home equity -- (10) -- -- --
Other consumer (34) (32) (32) (50) (142)
------- ------- ------- ------- -------
Total charge-offs (316) (466) (254) (210) (257)
------- ------- ------- ------- -------
Recoveries:
One- to four-family 61 21 3 1 13
Commercial business 7 -- -- -- --
Other consumer 11 15 9 3 14
------- ------- ------- ------- -------
Total recoveries 79 36 12 4 27
------- ------- ------- ------- -------
Net charge-offs (237) (430) (242) (206) (230)
Provisions charged to operations 120 792 714 129 211
------- ------- ------- ------- -------
Balance at end of period 1,496 1,613 1,251 779 856
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average gross loans outstanding during the period 0.85% 0.84% 0.49% 0.42% 0.53%
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average non-performing assets 13.89% 13.46% 9.64% 6.23% 7.11%
======= ======= ======= ======= =======
Ratio of allowance to gross loans outstanding
at end of period 2.89% 3.14% 2.45% 1.58% 1.83%
======= ======= ======= ======= =======
</TABLE>
24
<PAGE>
Allocation of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan losses
by category as prepared by the Association. This allocation is based on
management's assessment as of a given point in time of the risk characteristics
of each of the component parts of the total loan portfolio and is subject to
changes as and when the risk factors of each such component part change. The
allocation is not indicative of either the specific amounts or the loan
categories in which future charge-offs may be taken, nor should it be taken as
an indicator of future loss trends. The allocation of the allowance to each
category does not restrict the use of the allowance to absorb losses in any
category.
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
--------------------------------- ----------------------------------
(Dollars in Thousands)
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of loan Amounts Category of loan Amounts Category
loss by of Total loss by of Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $ 441 $ 35,706 68.91% $ 932 $ 36,891 71.92%
Multi-family and commercial 627 8,614 16.62% 238 7,950 15.50%
Construction and development 4 606 1.17% 3 539 1.05%
Commercial business 76 2,624 5.06% 43 1,422 2.77%
Home equity 25 3,143 6.07% 36 3,379 6.59%
Other consumer 64 1,122 2.17% 87 1,111 2.17%
Unallocated 259 - - 274 - -
------- -------- ------ ------- -------- ------
Total $ 1,496 $ 51,815 100.00% $ 1,613 $ 51,292 100.00%
======= ======== ====== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
---------------------------------- ------------------------------------
(Dollars in Thousands)
Percent Percent
of Loans of Loans
Amount Loan in Each Amount Loan in Each
of loan Amounts Category of loan Amounts Category
loss by of Total loss by of Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $ 770 $ 40,262 78.81% $ 592 $ 42,578 86.41%
Multi-family and commercial 93 4,635 9.07% 52 2,579 5.23%
Construction and development 4 938 1.84% 3 742 1.51%
Commercial business 27 1,230 2.41% 4 185 0.38%
Home equity 19 2,869 5.62% 9 2,265 4.60%
Other consumer 84 1,154 2.26% 72 920 1.87%
Unallocated 254 - - 47 - -
------- -------- ------ ----- -------- ------
Total $ 1,251 $ 51,088 100.00% $ 779 $ 49,269 100.00%
======= ======== ====== ===== ======== ======
</TABLE>
<TABLE>
<CAPTION>
September 30, 1994
--------------------------------
(Dollars in Thousands)
Percent
of Loans
Amount Loan in Each
of loan Amounts Category
loss by of Total
Allowance Category Loans
--------- -------- -----
<S> <C> <C>
One- to four-family $ 706 $ 42,973 91.89%
Multi-family and commercial 18 878 1.88%
Construction and development 3 701 1.50%
Commercial business - - -
Home equity 5 1,352 2.89%
Other consumer 108 861 1.84
Unallocated 16 - -
----- -------- ------
Total $ 856 $ 46,765 100.00%
===== ======== ======
</TABLE>
25
<PAGE>
Investment Activities
The Association must maintain minimum levels of investments and other assets
that qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. At September 30, 1998, the
Association's liquidity ratio for regulatory purposes (liquid assets as a
percentage of net withdrawable savings deposits and current borrowings) was
15.5%.
Securities. At September 30, 1998, the Company's securities totaled $7.2
million, or 10.5% of total assets. All securities held by the Company are
classified as "available for sale." Generally, the investment policy of the
Company is to invest funds among categories of investments and maturities based
upon the Company's market risk analysis policies, investment quality, loan and
deposit volume, liquidity needs and performance objectives. To date, the
Company's investment strategy has been directed toward callable government
agency obligations with terms not exceeding 15 years and certificates of deposit
with maturities of one year or less. At September 30 ,1998, the weighted average
term to maturity of the security portfolio, excluding marketable equity
securities, was 5.71 years. See Note 2 of the Notes to the Consolidated
Financial Statements for information regarding the maturities of the Company's
securities available for sale portfolio.
Mortgage-Backed Securities. In order to supplement its lending activities and
achieve its market risk analysis goals, the Association from time to time
invests in mortgage-backed securities. As of September 30, 1998, all of the
mortgage-backed securities owned by the Association were issued, insured or
guaranteed either directly or indirectly by a federal agency. However, it should
be noted that, while a (direct or indirect) federal guarantee may indicate a
high degree of protection against default, they do not indicate that the
securities will be protected from declines in value based on changes in interest
rates or prepayment speeds.
The Association primarily invests in fixed-rate mortgage backed securities with
average lives of seven years or less and variable rate mortgage-backed
securities with rate reset intervals not to exceed three years and average lives
of seven years or less. The average lives of the Association's mortgage-backed
securities are determined by reference to industry standard tables which take
into account historical prepayments on mortgage loans with specified interest
rates and terms to maturity. At September 30, 1998, all of the Association's
mortgage backed securities were issued or guaranteed by FHLMC, GNMA or FNMA, and
all were pass-through securities. On that date, $749,000 of the mortgage backed
securities were at fixed rates with a weighted average rate of 6.00% and
weighted average life of 2.58 years. The remaining $3.2 million of mortgage
backed securities had adjustable rates with a weighted average rate of 6.22% and
weighted average period to rate reset of 6 months.
Mortgage-backed securities generally have higher yields than investment
securities because of the longer terms and the uncertainties associated with the
timing of mortgage repayments. In addition, mortgage- backed securities are more
liquid than individual mortgage loans and may be used to collateralize
borrowings of the Association. However, these securities generally yield less
than the loans that underlie them because of the cost of payment guarantees or
credit enhancements that reduce credit risk. For information regarding the
Association's mortgage-backed securities portfolio, see Note 2 of the
Consolidated Financial Statements.
26
<PAGE>
The following table sets forth the composition of the Association's securities
and other earning assets at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- ----------------------------
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
------------- ----------- ------------ ----------- ------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
US Government agency obligations 6,252 56.32% 2,998 42.50% 2,998 39.43%
------- ------ ------ ------ ----- ------
Mortgage-backed securities:
FNMA 1,420 12.79% 753 10.66% 766 10.07%
FHLMC 1,552 13.98% 2,843 40.30% 3,379 44.44%
GNMA 967 8.71% -- -- -- --
------- ------ ------ ------ ----- ------
Total mortgage-backed securities AFS 3,939 35.48% 3,596 50.96% 4,145 54.51%
------- ------ ------ ------ ----- ------
Certificates of deposit 400 3.60% -- -- -- --
Common Stock 50 0.45% -- -- -- --
FHLB Stock 461 4.15% 461 6.54% 461 6.06%
------- ------ ------ ------ ----- ------
Total securities available for sale $11,102 100.00% $7,055 100.00% $7,604 100.00%
======= ====== ====== ====== ====== ======
Average remaining life of securities: 12.5 years 10.88 years 12.03 years
Other interest-earning assets:
Term deposit with FHLB $ -- -- $ -- -- $ -- --
Reverse repurchase agreement 1,500 60.00% -- -- -- --
Federal funds sold 1,000 40.00% -- -- 100 100.00%
------- ------ ------ ------ ------ ------
Total $ 2,500 100.00% $ -- 0.00% $ 100 100.00%
======= ====== ====== ====== ====== ======
</TABLE>
The Association's securities portfolio at September 30, 1998 did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Association's equity, excluding those issued by federal agencies.
The composition and maturities of the available for sale portfolio as of
September 30, 1998, excluding FHLB and common stock, are indicated in the
following table:
<TABLE>
<CAPTION>
At September, 30 1998
------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
---------- ---------- ---------- ---------- ---------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
US Government agency obligations $2,500 $ -- $3,002 $ 750 $ 6,252 $ 6,302
Mortgage-backed securities -- 749 -- 3,190 3,939 3,959
Certificates of Deposit 400 -- -- -- 400 400
------ ---- ------ ------ ------- -------
Total securities AFS $2,900 $749 $3,002 $3,940 $10,591 $10,661
====== ==== ====== ====== ======= =======
Weighted average yield 5.92% 6.00% 6.47% 6.27% 6.23%
</TABLE>
27
<PAGE>
The following table sets forth the final contractual maturities of the
Association's mortgage-backed securities portfolio at September 30, 1998:
<TABLE>
<CAPTION>
Less Than 1 to 3 to 5 5 to 10 10 to 20 Over 20
1 Year 3 Years Years Years Years Years
----------- ---------- -------------- -------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FNMA -- -- -- - - 1,419
FHLMC -- 749 -- - - 803
GNMA -- -- -- - - 968
--- ---- ---- ----- ------ ------
Total $ -- 749 $ -- - - $3,190
==== ==== ==== ===== ====== ======
Weighted average yield -- 6.00% -- - - 6.22%
</TABLE>
The following table shows mortgage-backed securities purchase, sale and
repayment activities of the Association for the periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1998 1997 1996
------------- -------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Purchases:
----------
Adjustable rate $ 2,026 $ - $ 2,281
Fixed rate - - 1,301
------------- -------------- ---------------
Total purchases 2,026 - 3,582
Sales:
------
Adjustable rate - - -
Fixed rate - - -
------------- -------------- ---------------
Total sales - - -
Principal repayments (1,678) (550) (431)
Discount/premium
accretion/amortization (5) 1 2
Fair value net change 54 66 (101)
------------- -------------- ---------------
Net increase (decrease) $ 397 $ (483) $ 3,052
============= ============== ===============
</TABLE>
Sources of Funds
General. Although deposits are the primary source of funds for the Association's
lending and investment activities and for its general business purposes, the
Association has occasionally relied upon borrowed funds or repurchase agreements
to supplement them. The Association has borrowed funds, either through direct
borrowings or through the sale of securities under agreements to repurchase,
when the cost of borrowings was attractive when compared to the rate required to
be paid on deposits plus the deposit insurance premium required to be paid.
28
<PAGE>
Borrowings. The Association may borrow under a line of credit agreement with the
FHLB of New York. FHLB advances typically are collateralized by all of the
assets of the Association. There were $2.0 million in FHLB advances outstanding
at September 30, 1998.
Under an agreement with the Association's investment portfolio safekeeping
agent, the Association may from time to time enter into security repurchase
agreements brokered through such agent whereby the Association obtains funds
from the sale of securities held in the securities portfolio with an agreement
to repurchase the securities either the next day or a set number of days
following the sale. There were no borrowings represented by repurchase
agreements at September 30, 1998.
See Note 7 of the Consolidated Financial Statements for information pertaining
to the maximum month-end balance, average balance and rates of the Association's
borrowings for years ended September 30, 1998 and 1997.
Deposits. The Association offers a variety of deposit programs to its customers,
including passbook and statement savings accounts, NOW accounts, money market
deposit accounts, checking accounts and time deposits. Deposit account terms
vary according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. The Association's
deposit are obtained predominantly from its Fulton County market area. The
Association relies primarily on customer service and long-standing relationships
with customers to attract and retain deposits; however, market interest rates
and rates offered by competing financial institutions significantly affect the
Association's ability to attract and retain deposits. The Association does not
generally pay premium rates for time deposits in excess of $100,000 nor does the
Association use brokers to obtain deposits.
The Association prices its deposit offerings based upon market and competitive
conditions in its market area. Based on its experience, the Association believes
that its checking, savings and money market accounts are relatively stable
sources of deposits. However, the ability of the Association to attract and
maintain certificates of deposit and the rates paid on those deposits has been
and will continue to be significantly affected by market conditions.
The following table sets forth the dollar amount of deposits in various types of
deposit programs offered by the Association as of the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- ----------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- ------------- ----------- ------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction and savings accounts
- --------------------------------
Passbook and statement savings $ 11,296 19.89% $ 12,004 21.40% $ 13,140 23.58%
Demand and N.O.W. accounts 5,742 10.11% 5,148 9.17% 5,174 9.29%
Money market accounts 12,564 22.12% 10,950 19.51% 10,392 18.65%
----------- ------------- ----------- ------------- ------------- -------------
Total transaction and savings accounts 29,602 52.12% 28,102 50.08% 28,706 51.52%
----------- ------------- ----------- ------------- ------------- -------------
Time Deposits
- -------------
Under 4.00% - - 3 - - -
4.00 - 4.99 % 2,721 4.79% 3,994 7.12% 11,357 20.38%
5.00 - 5.99 % 23,257 40.95% 21,942 39.10% 11,101 19.93%
6.00 - 6.99 % 1,181 2.08% 2,046 3.65% 4,525 8.12%
7.00 - 7.99 % 32 0.06% - - - -
8.00 - and over - - 30 0.05% 27 0.05%
----------- ------------- ----------- ------------- ------------- -------------
Total time deposits 27,191 47.88% 28,015 49.92% 27,010 48.48%
----------- ------------- ----------- ------------- ------------- -------------
Total deposits $ 56,793 100.00% $ 56,117 100.00% $ 55,716 100.00%
=========== ============= =========== ============= ============= =============
</TABLE>
29
<PAGE>
The following table sets forth the savings flows at the Association during the
periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------
1998 1997 1996
--------------- ------------------ ------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Opening balance $ 56,117 $ 55,716 $ 57,866
Deposits 134,900 143,875 116,344
Withdrawals (136,624) (145,899) (120,910)
Interest credited 2,400 2,425 2,416
--------- --------- ---------
Ending balance $ 56,793 $ 56,117 $ 55,716
========= ========= =========
Net increase (decrease) $ 676 $ 401 $ (2,150)
========= ========= =========
Percent increase (decrease) 1.20% 0.72% (3.72%)
========= ========= =========
</TABLE>
The following table indicates the amount of the Association's certificates of
deposit and other deposits by time remaining until maturity as of September 30,
1998:
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
--------------- --------------- ------------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than
$100,000 6,750 3,777 8,587 5,794 24,908
Certificates of deposit $100,000
or more 1,185 452 - 646 2,283
-------- -------- -------- -------- ---------
Total certificates of deposit 7,935 4,229 8,587 6,440 27,191
======== ======== ======== ======== =========
</TABLE>
30
<PAGE>
The following table shows the rate and maturity information for the
Association's time deposits as of September 30, 1998:
<TABLE>
<CAPTION>
Under 4.00 - 5.00 - 6.00 - 7.00 - 8.00 - Percent
4.00% 4.99% 5.99% 6.99% 7.99% 8.99% Total of Total
----------- ------- -------- ------- ----- -------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Time deposit accounts
maturing in quarter ending:
December 31, 1998 $ - $ 1,801 $ 6,043 $ 91 $ - $ - $ 7,935 29.18%
March 31, 1999 - 1,251 2,977 - - - 4,228 15.55%
June 30, 1999 - 10 3,458 - - - 3,468 12.75%
September 30, 1999 - 60 5,059 - - - 5,119 18.83%
December 31, 1999 - - 735 259 - - 994 3.66%
March 31, 2000 - - 408 260 - - 668 2.46%
June 30, 2000 - - 515 275 - - 790 2.91%
September 30, 2000 - 1 1,166 259 - - 1,426 5.24%
December 31, 2000 - - 199 8 - - 207 0.76%
March 31, 2001 - - 184 - - - 184 0.68%
June 30, 2001 - - 131 - - - 131 0.48%
September 30, 2001 - - 544 - - - 544 2.00%
December 31, 2001 - - 286 - - - 286 1.05%
Thereafter - - 1,179 - - 32 1,211 4.45%
------ -------- -------- -------- ----- ------ ---------
Total $ - $ 3,123 $ 22,884 $ 1,152 $ - $ 32 $ 27,191 100.00%
====== ======== ======== ======== ===== ====== =========
Percent of total - 11.49% 84.15% 4.24% - 0.12% 100.00%
</TABLE>
31
<PAGE>
Subsidiary Activities
As a federally chartered savings and loan association, the Association is
permitted by OTS regulations to invest up to 2% of its assets in the stock of,
or loans to, service corporation subsidiaries, and may invest an additional 1%
of its assets in service corporations where such additional funds are used for
inner-city or community development purposes. In addition to investments in
service corporations, federal institutions are permitted to invest an unlimited
amount in operating subsidiaries engaged solely in activities which a federal
savings association may engage directly. At September 30, 1998, the Association
did not have any subsidiaries.
Competition
The Association faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating loans comes primarily
from commercial banks, credit unions, mortgage bankers and other savings
institutions, which also make loans secured by real estate located in the
Association's market area. The Association competes for loans principally on the
basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
Competition for deposits is principally from commercial banks, credit unions,
mutual funds, securities firms and other savings institutions located in the
same communities. The ability of the Association to attract and retain deposits
depends on its ability to provide an investment opportunity that satisfies the
requirements of investors as to rate of return, liquidity, risk, convenient
locations and other factors. The Association competes for these deposits by
offering competitive rates, maintaining close ties within its local community,
advertising and marketing programs, convenient business hours and a
customer-oriented staff.
Employees
At September 30, 1998, the Association had a total of 27 employees including 2
part-time employees. None of the Association's employees are represented by any
collective bargaining agreement. Management considers its employee relations to
be good.
ITEM 2. PROPERTIES
The following table sets forth information concerning the main office and the
branch office of the Association at September 30, 1998. At September 30, 1998,
the Association's premises had an aggregate net book value of approximately
$780,000.
<TABLE>
<CAPTION>
Net Book Value at
Location Year Acquired Owned or Leased September 30, 1998
- -------- ------------- --------------- ------------------
<S> <C> <C> <C>
Main Office: 1962 own $550,000
52 North Main Street
Gloversville, NY 12078
Full Service Branch: 1983 own $230,000
295 Broadway
Saratoga Springs, NY 12866
</TABLE>
32
<PAGE>
The Association believes that its current facilities are adequate to meet the
present and foreseeable future needs of the Association and the Holding Company.
The Association's depositor and borrower customer files are maintained in-house.
The net book value of the data processing and computer equipment utilized by the
Association at September 30, 1998 was approximately $230,000.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved as plaintiff or defendant in various
legal proceedings arising in the normal course of business. While the ultimate
outcome of these various legal proceedings cannot be predicted with certainty,
it is the opinion of management that the resolution of these legal actions
should not have a material effect on the Company's financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1998, there were no matters submitted to
vote of shareholders of Adirondack Financial Services Bancorp, Inc.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following information included in the Annual Report to Shareholders for the
fiscal year ended September 30, 1998, (the "Annual Report"), is incorporated
herein by reference: "Shareholder Information - Common Stock," which appears on
page XX of the Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The following information included in the Annual Report is incorporated herein
by reference: "Selected Consolidated Financial Information" which appears on
page XX of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information included in the Annual Report is incorporated herein
by reference: "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which appears on pages XX through XX of the Annual
Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following information included in the Annual Report is incorporated herein
by reference: "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management," which appears on pages XX
through XX of the Annual Report.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information included in the Annual Report is incorporated herein
by reference: The consolidated statements of financial condition of Adirondack
Financial Services Bancorp, Inc. and Subsidiary as of September 30, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
September 30, 1998, together with the related notes and independent auditors'
report thereon, all of which appears on pages 22 through 50 of the Annual Report
and "Summary of Unaudited Consolidated Quarterly Financial Information" which
appears on page 52 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors of the Registrant is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 1999, a copy of which will be filed not later than
120 days after the close of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 1999, a copy of which will be filed not later than
120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in 1999, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held in 1999, a copy of which will
be filed not later than 120 days after the close of the fiscal year.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements and exhibits filed as part of this
report:
(1) The consolidated statements of financial condition of Adirondack
Financial Services Bancorp, Inc. and subsidiary as of September 30,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the
three-year period ended September 30, 1998, together with the related
notes and the independent auditors' report thereon, appearing in the
Annual Report on pages 22 through 50 are incorporated herein by
reference.
34
<PAGE>
(2) Schedules omitted as they are not applicable
(3) Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference: Regulation S-K Exhibit
Reference
Number Description
3.1 Certificate of Incorporation of Adirondack Financial Services
Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 No. #333-43697, of Adirondack
Financial Services Bancorp, Inc., filed on February 9, 1998,
(hereinafter "Form S-1")
3.2 By laws of Adirondack Financial Services Bancorp, Inc.
(Incorporated by reference to Exhibit 3.2 to Form 8-K filed on
November 19, 1998.)
4 Specimen Stock Certificate (Incorporated by reference to Exhibit
4 to Form S-1.)
10.1 Adirondack Financial Services Bancorp, Inc. 1998 Stock Option and
Incentive Compensation Plan (Incorporated by reference to Proxy
Statement for Special Meeting of Stockholders of Adirondack
Financial Services Bancorp, Inc. held on October 7, 1998.)
10.2 Adirondack Financial Services Bancorp, Inc. 1998 Management
Recognition Plan (Incorporated by reference to Proxy Statement
for Special Meeting of Stockholders of Adirondack Financial
Services Bancorp, Inc. held on October 7, 1998.)
10.3 Change-In-Control Severance Agreement between Lewis E. Kolar and
Adirondack Financial Services Bancorp, Inc. (Incorporated by
reference to Exhibit 10.3 to Forms S-1.)
10.4 Change-In-Control Severance Agreement between Menzo D. Case and
Adirondack Financial Services Bancorp, Inc. (Incorporated by
reference to Exhibit 10.3 to Forms S-1.)
10.5 Amended Adirondack Financial Services Bancorp, Inc. Employee
Stock Ownership Plan on October 7, 1998
13 1998 Annual Report to security holders
21 Subsidiaries of the registrant
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Adirondack Financial Services Bancorp, Inc.
(registrant)
By: /s/ Lewis E. Kolar
--------------------------------------------------
Lewis E. Kolar
Director, President & Chief Executive Officer
Date: December 29, 1998
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Lewis E. Kolar Director, President & Chief December 29, 1998
- ------------------------ Executive Officer
Lewis E. Kolar
/s/ Menzo D. Case Chief Financial Officer December 29, 1998
- ------------------------ (Principal Financial
Menzo D. Case Officer & Principal
Accounting Officer)
/s/ Richard R. Ruby Chairman of the Board December 29, 1998
- ------------------------
Richard R. Ruby
/s/ Dr. Priscilla J. Bell Director December 29, 1998
- -------------------------
Dr. Priscilla J. Bell
/s/ Timothy E. Delaney Director December 29, 1998
- -------------------------
Timothy E. Delaney
/s/ Donald I. Lee Director December 29, 1998
- -------------------------
Donald I. Lee
/s/ Dr. Robert J. Sofarelli Director December 29, 1998
- -------------------------
Dr. Robert J. Sofarelli
36
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage of State of Incorporation
Parent Subsidiary Ownership or Organization
- ------ ---------- ----------- -----------------------
<S> <C> <C> <C>
Adirondack Financial Gloversville Federal 100% New York
Services Bancorp, Inc. Savings and Loan
Association
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Information
At September 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total assets $ 68,241 $ 61,022 $ 61,006 $ 63,073 $ 69,597
Cash and cash equivalents 4,745 1,922 1,198 3,181 6,509
Net loans receivable 50,201 49,526 49,636 48,239 45,645
Mortgage-backed securities available for sale 3,959 3,562 4,044 993 3,968
Other securities available for sale 7,213 3,455 3,395 4,138 5,781
---------- ----------- ----------- ----------- -----------
Total securities available for sale 11,172 7,017 7,439 5,131 9,749
---------- ----------- ----------- ----------- -----------
Investment securities held to maturity - - - 4,402 5,459
Deposits 56,793 56,117 55,716 57,866 64,703
Borrowings 2,000 1,300 300 - -
Total equity 9,155 3,280 3,790 4,854 4,705
Selected Consolidated Operations Data
For the Years Ended September 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ----------- ----------- -----------
(In Thousands)
Interest income 5,006 4,905 4,733 4,816 4,805
Interest expense 2,525 2,447 2,416 2,527 2,148
---------- ----------- ----------- ----------- -----------
Net interest income 2,481 2,458 2,317 2,289 2,657
Provision for loan losses 120 792 714 129 211
---------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 2,361 1,666 1,603 2,160 2,446
---------- ----------- ----------- ----------- -----------
Net gain on sale of securities - - - 204 -
Other non-interest income 175 155 109 188 69
---------- ----------- ----------- ----------- -----------
Total non-interest income 175 155 109 392 69
---------- ----------- ----------- ----------- -----------
Non-interest expense 2,213 2,319 2,970 2,199 2,119
---------- ----------- ----------- ----------- -----------
(Loss) income before income tax (benefit) expense 323 (498) (1,258) 353 396
Income tax expense (benefit) 89 85 (222) 102 124
---------- ----------- ----------- ----------- -----------
Net (loss) income 234 (583) (1,036) 251 272
========== =========== =========== =========== ===========
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Ratios and Other Data
9/30/98 9/30/97 9/30/96 9/30/95 9/30/94
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return (loss) on average assets 0.36% (0.95%) (1.69%) 0.38% 0.42%
Return (loss) on average equity 5.14% (16.30%) (22.22%) 5.30% 5.97%
Interest rate spread information:
Average during period 3.87% 3.96% 3.68% 3.35% 4.43%
End of period 3.75% 4.19% 4.21% 3.61% 4.05%
Net interest margin 4.02% 4.11% 3.91% 3.55% 4.42%
Ratio of operating expenses to average total assets (1) 3.39% 3.63% 3.61% 3.11% 3.17%
Efficiency ratio (2) 82.20% 85.94% 91.10% 86.67% 75.85%
Ratio of average interest-earning assets
to average interest-bearing liabilities 103.87% 103.76% 105.53% 105.01% 99.70%
Quality ratios:
Non-performing assets to total assets
at end of period 3.05% 6.73% 3.74% 4.38% 5.53%
Allowance for loan loss to non-performing loans
at end of period 81.91% 42.53% 56.53% 30.20% 24.34%
Allowance for loan losses to gross loans receivable
at end of period 2.89% 3.14% 2.45% 1.58% 1.83%
Capital ratios:
Equity to total assets at end of period 13.42% 5.38% 6.21% 7.70% 6.76%
Average equity to average assets 7.08% 5.78% 7.62% 7.11% 6.99%
Other data:
Number of full service offices 2 2 2 2 2
</TABLE>
(1) Operating expenses exclude OREO expenses of $30,000, $73,000, $27,000,
$127,000 and $52,000 for years ended September 30, 1998, 1997, 1996, 1995
and 1994, respectively. In addition, operating expenses for the the year
ended September 30, 1996 exclude expenses incurred by the Association for
taxes paid on behalf of delinquent borrowers of $318,000 and the special
one-time SAIF assessment of $415,000.
(2) The efficiency ratio represents operating expenses (as defined in footnote
1 above) divided by the sum of net interest income and other operating
income (excluding a gain on sale of building of $86,000 and net gains from
security transactions of $204,000 for the year ended September 30, 1995).
39
<PAGE>
Summary of Unaudited Consolidated Quarterly Financial Information
<TABLE>
<CAPTION>
For the Year Ended September 30, 1998
---------------------------------------------------------------
First Second Third Fourth Year
----------- ------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Interest income 1,185 1,224 1,291 1,306 5,006
Interest expense 627 652 625 621 2,525
----------- ------------ ------------ ------------ ------------
Net interest income 558 572 666 685 2,481
Provision for loan losses 15 15 15 75 120
----------- ------------ ------------ ------------ ------------
Net interest income after provision for loan losses 543 557 651 610 2,361
----------- ------------ ------------ ------------ ------------
Net gain on sale of securities - - - - -
Other non-interest income 53 34 41 47 175
----------- ------------ ------------ ------------ ------------
Total non-interest income 53 34 41 47 175
----------- ------------ ------------ ------------ ------------
Non-interest expense 557 536 569 551 2,213
----------- ------------ ------------ ------------ ------------
Income before income tax expense 39 55 123 106 323
Income tax expense 15 22 50 2 89
=========== ============ ============ ============ ============
Net income 24 33 73 104 234
=========== ============ ============ ============ ============
Net income per common share* n/a n/a $ 0.12 $ 0.17 $ 0.19
</TABLE>
* The Company completed its initial public offering on April 6, 1998, so net
income per common share is not applicable to all periods prior to that
date, and is based on weighted average common shares outstanding excluding
unallocated ESOP shares. In calculating 1998 fiscal year's earnings per
share, post conversion net income and weighted average shares outstanding
were used. See Note 1 to the Notes to the Consolidated Financial
Statements.
Certain reclassifications have been made to prior years' amounts to conform with
the current year's presentation.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Adirondack Financial Services Bancorp, Inc. (the "Holding Company" or
"Adirondack Financial") was incorporated under Delaware law in December 1997 as
a bank holding company to purchase 100% of the common stock of Gloversville
Federal Savings and Loan Association (the "Association"). On April 6, 1998, the
Association converted from a mutual form to a stock institution, at which time
the Holding Company purchased all of the outstanding stock of the Association,
and the Holding Company completed its initial public offering, issuing 661,250
shares of $.01 par value common stock at $10.00 per share. Net proceeds to the
Company were $6.0 million after conversion and stock offering costs, and $5.5
million excluding the shares acquired by the Company's newly formed Employee
Stock Ownership Plan (the "ESOP").
The consolidated financial condition and operating results of the Company are
primarily dependent upon its wholly owned subsidiary, the Association, and all
references to the Company and its financial data prior to April 6, 1998, except
where otherwise indicated, refer to the Association and its financial data.
The Association has operated as a community-oriented financial institution,
obtaining deposits from its local community and investing those deposits
principally in residential one-to-four family mortgage loans and, to a lesser
extent, multi-family and commercial real estate, commercial business, home
equity and consumer loans. In addition, the Association invests excess funds not
used for loan originations in securities issued by the United States government
or its agencies, and mortgage backed securities. Deposits are offered at various
interest rates only within the Association's primary market area. There are no
brokered deposits maintained by the Association.
The Association's profitability, like that of many financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between the interest it receives on interest-earning assets, such as
loans and investments, and the interest it pays on interest-bearing liabilities,
such as deposits and borrowings. In other words, the Association's results of
operations are significantly dependent on its interest rate spread.
Results of operations are also affected by the Association's provision for loan
losses, noninterest expenses such as salaries and employee benefits and, to a
lesser extent, noninterest income such as service charges on deposit accounts.
Financial institutions in general, including the Company, are significantly
affected by economic conditions, competition and the monetary and fiscal policy
of the federal government. Lending activities are influenced by the demand for
and the supply of housing, competition among lenders, the interest rate
conditions and funds availability. Deposit balances and cost of funds are
influenced by prevailing market rates on competing investments, customer
preference and the levels of personal income and savings in the Association's
primary market area.
Financial Condition
Total assets were $68.2 million at September 30, 1998, an increase of $7.2
million or 11.8% from $61.0 million at September 30, 1997. The asset increase
resulted principally from the receipt of net investable proceeds of $5.5 million
from the Company's stock offering consummated April 6, 1998, with the balance
funded by an increase of $677,000 or 1.2% in total deposits from $56.1 million
at September 30, 1997 to $56.8 million at September 30, 1998, an increase in
borrowings of $700,000 or 53.8% from $1.3 million to $2.0 million during the
same period and retention of the Company's net income of $234,000 for the fiscal
year ended September 30, 1998.
41
<PAGE>
Cash and cash equivalents increased to $4.7 million at September 30, 1998, an
increase of $2.8 million or 146.9%. Cash and cash equivalents had been much
higher during the year, first as the Company held the proceeds of stock
subscriptions prior to consummation of the stock offering and later as the
Company gradually deployed the offering proceeds. The balance of cash and cash
equivalents held at September 30, 1998 includes $1.5 million invested in a
short-term reverse repurchase agreement by the Holding Company. There were no
balances outstanding for reverse repurchase agreements at September 30, 1997.
Investments available for sale were $11.2 million at September 30, 1998 as
compared to $7.0 million at September 30, 1997, an increase of $4.2 million or
59.21%. Investments now represent 16.4% of total assets as compared to 11.5% at
September 30, 1997. The net increase in investments held represents the
investment of the net public offering proceeds principally in U.S. government
agency callable securities which increased by $3.3 million or 108.5% from $3.0
million at September 30, 1997 to $6.3 million at September 30, 1998. To a lesser
extent, offering proceeds were also invested in mortgage-backed securities which
increased $344,000 or 9.6% during the same period from $3.6 million to $3.9
million. Prior to the offering, $700,000 was invested in short-term certificates
of deposit in order to obtain higher yields than term deposits offered through
the FHLB. At September 30, 1998, there were $400,000 of these certificates of
deposit held as investments, maturing within 9 months. There were no
certificates of deposit held as investments at September 30, 1997. During fiscal
1998, the market value of the investment portfolio increased $108,000.
Net loans receivable increased $675,000 or 1.4% from $49.5 million at September
30, 1997 to $50.2 million at September 30, 1998. One-to-four family residential
mortgages declined from $36.9 million at September 30, 1997 by $1.2 million or
3.2% to $35.7 million at September 30, 1998 and now represent 68.9% of gross
loans outstanding as compared to 71.9% at September 30, 1997. The decline is the
result of increased competition in the residential mortgage market driven by
declining interest rates and to the Association's increased emphasis during the
year, on multi-family and commercial real estate and commercial business loans.
Reflecting the increased emphasis, multi-family and commercial real estate loan
balances were $8.6 million at September 30, 1998, an increase of $664,000 or
8.4% from the September 30, 1997 balance of $8.0 million, and commercial
business loan balances increased $1.2 million or 84.5% from $1.4 million at
September 30, 1997 to $2.6 million at September 30, 1998. Home equity loans
declined $236,000 or 7.0% from $3.4 million at September 30, 1997 to $3.1
million at September 30, 1998. The decline in home equity loans was the result
of the lower interest rate environment which encouraged customers to refinance
their underlying first mortgages and repay their home equity loans. The
Association's construction and consumer loan portfolios did not change
significantly during fiscal 1998.
Total deposits increased $677,000 or 1.2% from $56.1 million at September 30,
1997 to $56.8 million at September 30, 1998. The increases in demand and NOW
accounts, which increased $594,000 or 11.5% during fiscal 1998, and money market
accounts, which increased $1.6 million or 14.7% during fiscal 1998, were offset
somewhat by savings accounts decreasing $707,000 or 5.9% and time deposits
decreasing $824,000 or 2.9% during the same period. The increase in checking
accounts is the result of increased market penetration in the commercial sector
and due to increased balances of official check accounts. The growth noted in
money market accounts is consistent with the trend begun in fiscal 1995 when the
Association began to focus its marketing efforts on these accounts. The decrease
in savings is a continuing of a trend over the past several years, as the
general level of interest rates paid on savings deposits has become less
42
<PAGE>
attractive, and depositors either switched into higher yield products such as
money market accounts or withdrew their accounts. The decline in time deposits
is primarily due to the maturing of higher yielding time deposits which were not
renewed as the Association has been less aggressive in its pricing of time
deposits.
Borrowings at September 30, 1998 were $2.0 million, $700,000 or 53.8% greater
than the $1.3 million outstanding at September 30, 1997. The Association
replaced matured time deposits that were not maintained with shorter term FHLB
borrowings.
Stockholders' equity at September 30, 1998 was $9.2 million, an increase of $5.9
million from the Association's net worth at September 30, 1997. The increase
represents the receipt of net proceeds of $5.5 million from the Company's
initial public offering, plus retained earnings of $234,000 for the fiscal year
ended September 30, 1998 and an increase in the fair value of investments
available for sale, net of taxes, of $61,000. Shareholders' equity as a percent
of total assets was 13.42% at September 30, 1998 as compared to 5.38% at
September 30, 1997. Book value per common share at September 30, 1998 was
$13.80, or $14.87 excluding the remaining unallocated ESOP shares.
Asset/Liability Management
The Association's net interest income is sensitive to changes in interest rates,
as the rates paid on its interest-bearing liabilities generally change faster
than the rates earned on its interest-earning assets. As a result, net interest
income will frequently decline in periods of rising interest rates.
In managing its asset/liability mix, the Association, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, often places more emphasis on managing short-term net
interest margin than on better matching interest rate sensitivity of its assets
and liabilities. Management believes that the increased net interest income
resulting from a mismatch in the maturity of its asset and liability portfolios
can, during periods of declining or stable interest rates, provide high enough
returns to justify the increased exposure to sudden and unexpected increases in
interest rates.
The Board has taken a number of steps to manage the Association's vulnerability
to changes in interest rates. First, in connection with the Association's
decision to increase the Association's multi-family and commercial real estate
and commercial business lending as well as its increased emphasis in home equity
lending, the Association has increased its interest rate sensitive lending
(which includes all loans which reprice in five years or less). The
Association's interest rate sensitive loans represent $15.7 million or 30.3% of
the portfolio at September 30, 1998 as compared to $15.4 million or 29.7% at
September 30, 1997. Second, the Association has used community outreach,
customer service and marketing efforts to acquire the proportion of its deposit
consisting of money market and other transaction accounts. These deposits are
believed to be less interest rate sensitive than other types of deposit
accounts. The Association's money market and transaction accounts represent
$29.6 million or 52.1% of deposits at September 30, 1998 as compared to $28.1
million or 50.1% at September 30, 1997. Finally, the Association has focused a
significant portion of its investment activities on securities with adjustable
interest rates or average lives of seven years or less. At September 30, 1998,
$3.9 million or 100.0% of the Association's mortgage-backed securities had
adjustable interest rates or average lives of seven years or less based on their
amortized cost. In addition, $400,000 in certificates of deposit were held at
September 30, 1998 maturing in eight months or less. Also, the Association held
$6.3 million in U.S. Government callable agency notes at September 30, 1998
which were all callable within one year.
43
<PAGE>
The asset and liability strategies are implemented by the Association's
asset/liability management committee that meets periodically to determine the
rates of interest for loans and deposits and consists of the President,
Executive Vice President and Vice President - Commercial Loans. Interest rates
on loans in the short-term are primarily based on the interest rates offered by
other financial institutions in the Association's market area as well as on the
availability of funds. Rates on deposits in the short-term are primarily based
on the Association's need for funds and on a review of rates offered by other
financial institutions in the Association's market area. Ultimately, the
customer plays a significant role in the establishment of both loan and deposit
rates, as it is necessary to remain competitive in both loan and deposit markets
in order to maintain or further expand the customer base.
The Committee develops longer-term pricing strategies based on review of
interest rate sensitivity reports produced quarterly. The Committee also
monitors the impact of the interest rate risk and earnings consequences of such
strategies for consistency with the Association's liquidity needs, growth and
capital adequacy. The Board of Directors receives and reviews the Association's
estimated interest rate sensitivity report every quarter.
In order to encourage savings associations to reduce their interest rate risk,
the OTS measures the sensitivity of the net portfolio value ("NPV") to changes
in interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
The following table presents the Association's NPV at September 30, 1998, as
calculated by the OTS, based on quarterly information provided to the OTS by the
Association:
Assumed Basis Estimated NPV to PV
Points Change NPV Amount of Change % Change
in Interest Rates (in 000's) Total Assets in NPV in NPV
- ----------------------- -------------- -------------- ---------- -----------
+400 $ 8,078 11.46% $(3,100) (27.73%)
+300 9,029 12.81% (2,262) (20.24%)
+200 9,896 14.04% (1,360) (12.17%)
+100 10,576 15.01% (560) (5.01%)
0 11,178 15.86% - -
-100 11,727 16.64% 241 2.16%
-200 12,378 17.56% 503 4.50%
-300 13,219 18.76% 864 7.73%
-400 14,075 19.97% 1,450 12.97%
Certain assumptions utilized by the OTS in assessing the interest rate risk of
savings associations were employed in preparing the previous table. These
assumptions related to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Association's assets and liabilities would perform
as set forth above.
Comparison of Operating Results for the Years Ended September 30, 1998 and 1997.
Net income. The Association's fiscal 1998 net income of $234,000 was $817,000 or
140.1% greater than the net loss from fiscal year 1997 of $583,000. The
increased net income between the two periods is primarily attributable to an
increase of $22,000 in net interest income, a reduction of $672,000 in the
provision for loan losses, an additional $20,000 in non-interest income and a
$106,000 net reduction in operating expenses.
44
<PAGE>
Interest income. Interest income for the year ended September 30, 1998 was $5.0
million as compared to $4.9 million for the year ended September 30, 1997, an
increase of $101,000 or 2.1%. Average earning assets were $61.7 million, an
increase of $1.9 million or 3.2% over fiscal 1997. The net yield earned on
average earning assets was 8.12% for the year ended September 30, 1998, down
slightly from 8.21% in fiscal 1997. The increase in interest income was
primarily the result of a higher level of interest-earning assets related to the
Company's initial public offering which provided net investable proceeds of $5.5
million, the effects of which were somewhat offset by a lower net yield on the
average earning assets as those proceeds could not immediately be invested
prudently in loans, the Company's highest yielding asset category. In addition,
net interest income and average earning assets were favorably impacted by the
approximately $19.3 million of common stock subscriptions held by the
Association pending consummation of the Company's stock offering.
Interest expense. Interest expense for the year ended September 30, 1998 was
$2.5 million as compared to $2.4 million for the year ended September 30, 1997,
an increase of $79,000 or 3.2%. Average interest-bearing liabilities increased
from $57.6 million for fiscal 1997 by $1.8 million or 3.1% to $59.4 million for
fiscal 1998. The average cost of interest-bearing liabilities was 4.25% for
fiscal 1998 and 1997. Savings deposit average balances declined $707,000 or 5.7%
during fiscal 1998 which is consistent with decreases noted in prior years. The
cost of savings accounts remained fairly constant in fiscal 1998 as compared to
fiscal 1997; however, the increased average balance of Demand and NOW accounts
was primarily the result of the common stock subscriptions held by the
Association that were included in this category which averaged approximately
$2.5 million. The Association paid interest on those subscriptions at its
savings deposit rate of 3.00%, the effects of which were offset by increased
commercial demand deposits on which interest is not paid. The average balance of
money market accounts increased $1.0 million or 9.4% during fiscal 1998 while
the cost of money market accounts increased 10 basis points from 4.09% in fiscal
1997 to 4.19% in fiscal 1998. The increased money market average balance is
consistent with the successes in gaining market share of this product, and the
higher cost of money market accounts is due to the higher individual balances
maintained for which a higher rate is paid by the Association. The average
balance of time deposits declined by $2.6 million or 9.2% from $28.7 million in
fiscal 1997 to $26.1 million in fiscal 1998 with a corresponding increase of 23
basis points in the cost of time deposits during the same period. The decline in
the average balance of time deposits is the result of maturing time deposits
that have not been renewed. The increased time deposit cost is due to maturing
time deposits being renewed at higher rates. Borrowings were used by the
Association to meet short-term funding needs and provided a lower marginal cost
to the Association as compared to other funding sources. The average balance of
borrowings for fiscal 1998 was $2.2 million as compared to $391,000 for fiscal
1997. The average cost of borrowings for fiscal 1998 was 5.8% as compared to
5.6% for fiscal 1997.
45
<PAGE>
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
Non-accrual loans have been included in the table as loans receivable with
interest earned recognized on a cash basis only. All average balances are
monthly average balances.
<TABLE>
<CAPTION>
9/30/98 9/30/97
-------------------------------------------- ------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate
------------ --------- ---------- ----------- ----------- -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net of deferred loan fees $ 50,675 $ 4,356 8.60% $ 51,303 $ 4,409 8.59%
Securities at amortized cost 7,466 467 6.26% 7,337 459 6.26%
Interest-earning deposits 3,546 183 5.16% 1,113 37 3.32%
-------- ------- -------- -------
Total earning assets 61,687 5,006 8.12% 59,753 4,905 8.21%
------- -------
Non-interest earning assets 2,635 1,954
-------- --------
Total assets $ 64,322 $ 61,707
======== ========
Interest-bearing liabilities:
Savings deposits $ 11,796 374 3.17% $ 12,503 401 3.21%
Demand and N.O.W. 7,686 95 1.24% 5,316 65 1.22%
MMDA 11,676 489 4.19% 10,676 437 4.09%
Time deposits 26,075 1,442 5.53% 28,704 1,522 5.30%
Borrowings 2,157 125 5.80% 391 22 5.63%
-------- ------- -------- -------
Total interest-bearing liabilities 59,390 2,525 4.25% 57,590 2,447 4.25%
------- -------
Non-interest bearing liabilities 376 541
-------- --------
Total liabilities 59,766 58,131
Total equity 4,556 3,576
-------- --------
Total liabilities and equity $ 64,322 $ 61,707
======== ========
Net interest/spread $ 2,481 3.87% $ 2,458 3.96%
======= ==== ======= ====
Margin 4.02% 4.11%
==== ====
Assets to liabilities 103.87% 103.76%
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
9/30/96
--------------- -------------------------------------------
Average Interest
Outstanding Earned/
Yield/Rate Balance Paid Yield/Rate
-------------- -------------- -------------- -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net of deferred loan fees $ 49,222 $ 4,132 8.39%
Securities at amortized cost 7,764 467 6.01%
Interest-earning deposits 2,298 134 5.83%
-------- -------
Total earning assets 59,284 4,733 7.98%
-------
Non-interest earning assets 1,866
--------
Total assets $ 61,150
========
Interest-bearing liabilities:
Savings deposits $ 13,724 433 3.16%
Demand and N.O.W. 4,805 69 1.44%
MMDA 7,287 247 3.39%
Time deposits 30,358 1,667 5.49%
Borrowings 6 - 5.56%
-------- -------
Total interest-bearing liabilities 56,180 2,416 4.30%
-------
Non-interest bearing liabilities 306
--------
Total liabilities 56,486
Total equity 4,664
========
Total liabilities and equity $ 61,150
========
Net interest/spread $ 2,317 3.68%
======= ====
Margin 3.91%
====
Assets to liabilities 105.53%
========
</TABLE>
46
<PAGE>
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) change in rate (i.e., changes
in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Year Ended September 30, Year Ended September 30,
1998 vs. 1997 1997 vs. 1996
-------------------------------------------- ------------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
----------------------------- (Decrease) ------------------------ (Decrease)
Volume Rate Volume Rate
-------------- -------------- -------------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net of deferred fees (54) 1 (53) 178 99 277
Securities at amortized cost 8 - 8 (27) 19 (8)
Interest-bearing deposits 117 29 146 (44) (53) (97)
------- ------- ------ ------ ------ ------
Total interest-earning assets 71 30 101 107 65 172
------- ------- ------ ------ ------ ------
Interest-earning liabilities:
Savings deposits (22) (5) (27) (39) 7 (32)
Demand and NOW 29 1 30 7 (11) (4)
MMDA 42 10 52 132 58 190
Time Deposits (143) 63 (80) (89) (56) (145)
Borrowings 102 1 103 22 - 22
------- ------- ------ ------ ------ ------
Total interest-bearing liabilities 8 70 78 33 (2) 31
------- ------- ------ ------ ------ ------
Net interest income 63 (40) 23 74 67 141
======= ======= ====== ====== ====== ======
</TABLE>
Provision for loan losses. The Association continually monitors and adjusts its
allowance for loan losses based upon its analysis of the loan portfolio. The
allowance is increased by the recording of a provision for loan losses, the
amount of which depends on an analysis of the risks inherent in the
Association's loan portfolio. The provision for loan losses decreased $672,000
or 84.9% for fiscal 1998 to $120,000 from $792,000 for fiscal 1997. The decrease
in the amount of the provision for fiscal 1998 was based on management's
evaluation of the improved inherent risk in the Association's loan portfolio as
evidenced by a $2.0 million or 51.9% decrease in nonperforming loans to $1.8
million at September 30, 1998 as compared to $3.8 million at September 30, 1997;
significantly decreased net loan charge offs amounting to $237,000 in fiscal
1998, $193,000 or 44.9% less than in 1997; and improved delinquency statistics
on the loan portfolio.
While the Association believes that it uses the best information available to
determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination. Management believes
its allowance for loan losses is adequate at September 30, 1998; however, future
adjustments could be necessary and net income could be adversely affected if
circumstances differ substantially from the assumptions used in the
determination of the allowance for loan losses.
47
<PAGE>
Other Income. Other income increased $20,000 or 13.17% to $176,000 during fiscal
1998 from $155,000 for fiscal 1997. This increase was primarily due to new fees
introduced during fiscal 1998.
Operating expenses. Operating expenses for the year ended September 30, 1998 was
$2.2 million, a decrease of $106,000 or 4.6% from $2.3 million for the year
ended September 30, 1997. Increases in compensation and benefits partially
offset decreases in all other operating expenses.
Compensation and benefits increased from $892,000 for fiscal 1997 to $940,000,
an increase of $48,000 or 5.3%. The additional expenses are due to increased
salaries paid to employees, additional cost incurred for the ESOP and higher
costs incurred for health and medical benefits. The average increase given
employees in July 1998 was 3.6% or additional expense of approximately $13,000.
The Association incurred $85,000 in retirement expenses, approximately $28,000
greater than fiscal 1997. The retirement expense included $17,000 which
represented 401(k) matching contributions and $68,000 which represented expenses
related to the ESOP. The Association did not make any matching contributions to
the 401(k) plan after December 31, 1997 and does not plan to make any during
fiscal 1999. In April 1998, as part of the Association's conversion to the stock
form of ownership, the Company established an ESOP which purchased 8% of the
initial public offering with funds borrowed from the Company. Compensation
expense related to the ESOP's initial stock purchase will be recognized over a
period of 10 years as the loan is repaid. Shares of stock will be released from
the lien of the loan on a pro rata basis as the loan is repaid, and expense will
be calculated based upon the average market value during the respective service
period on the shares released. It is expected that the 1999 ESOP expense will be
higher if the average price of the Company's stock increases. In addition,
management also expects additional personnel costs in fiscal 1999 of $50,000
related to the implementation of the shareholder approved Management Recognition
Program ("MRP").
Directors' fees and expenses declined $15,000 or 14.6% during fiscal 1998 from
$103,000 in fiscal 1997 to $88,000 which is attributable to a reduction in the
number of directors. Advertising expense was $102,000 for fiscal 1998, a
decrease of $9,000 or 8.0% from fiscal 1997, reflecting a reduction in the types
of advertising used during fiscal 1997. The decreased expenses for occupancy and
equipment of $12,000 or 5.3% and $21,000 or 6.5%, respectively, for the year
ended September 30, 1998 are the result of continued improvements in efficiency
and a reduction in repairs and maintenance costs. OREO costs were $30,000 for
fiscal year 1998, a reduction of $43,000 or 59.3% from fiscal 1997. The decrease
is primarily attributable to a reduction in the period OREO was held and to
fewer foreclosed properties being held. Other expenses were reduced by $52,000
or 9.7% from $539,000 to $487,000 primarily through reductions of discretionary
items such as contributions and meals and entertainment expenses.
Income Tax Expense. Income tax expense for fiscal 1998 was $89,000 as compared
to $85,000 in fiscal 1997, an increase of $4,000 or 5.2%. The effective tax rate
for fiscal 1998 was 28% which was principally the result of a $50,000 reduction
in the Company's deferred tax valuation reserve primarily as a result of
increased taxable income, amounting to approximately $173,000, the reversal of
temporary taxable items and reliance on future taxable income, amounting to
approximately $225,000.
48
<PAGE>
Comparison of Operating Results for the Years Ended September 30, 1997 and 1996.
Net Loss. The Association's fiscal 1997 net loss of $583,000 was $453,000 or
43.8% less than the fiscal 1996 net loss of $1.0 million. The net loss for
fiscal 1997 was reduced from fiscal 1996 primarily as a result of an increase of
$141,000 or 6.1% in net-interest income, and a $652,000 or 21.9% reduction in
other expenses consisting primarily of $415,000 related to the one-time SAIF
assessment and $318,000 expense related to past due property taxes on certain
non-performing one-to-four family residential loans, partially offset by a
decrease in income tax benefit of $307,000 or 138%.
Interest income. Interest and fees on loans increased by approximately $277,000
or 6.7% to $4.4 million for fiscal 1997, from $4.1 million for fiscal 1996. The
increase for fiscal 1997 was largely the result of an increase of $2.1 million
or 4.2% in the average balance of loans outstanding during fiscal 1997, to $51.3
million, as compared to $49.2 million in fiscal 1996. This increase was
primarily in the area of multi-family and commercial real estate, home equity
and commercial business loans offset by decreases in the average balance of
residential one-to-four family loans. At September 30, 1997, multi-family and
commercial real estate, home equity and commercial business loans totaled $12.8
million as compared to $8.7 million at September 30, 1996. This increase
reflects management's plan to diversify the loan portfolio, increase portfolio
yield, and increase the amount of adjustable rate loans. Originated with various
terms and repricing schedules, these loans generally provide certain benefits
compared to longer term, fixed rate, residential one-to-four family loans.
However, multi-family and commercial real estate and commercial business loans
generally have higher outstanding loan balances and increased credit risk
relative to residential one-to-four family loans. In addition to the increase in
the average balance of loans, the yield earned on the average balance of loans
receivable increased by 20 basis points to 8.59% in fiscal 1997 as compared to
1996 due in part to the higher yielding nature of multi-family and commercial
real estate and commercial business loans.
Interest income on securities available for sale decreased by $8,000 or 1.7%.
There were no investment purchases or sales during fiscal 1997. Accordingly, the
reduction in interest income on securities available for sale is solely
attributable to reduced average balances as a result of principal repayments.
The average balance decreased $427,000 or 5.5% during fiscal 1997.
Interest income on interest-bearing time deposits decreased $98,000 or 72.7% as
a result of reduced average balances, coupled with lower contracted rates.
Periodically in fiscal 1996, interest-bearing time deposits were contracted on a
longer term basis, resulting in a higher yielding investment in 1996 as compared
to 1997. Interest-bearing time deposits were primarily invested on an overnight
basis in fiscal 1997.
The yield on the average balance of interest-earning assets was 8.21% and 7.98%
for fiscal 1997 and 1996, respectively.
Interest Expense. Interest expense of $2.4 million remained relatively
consistent for the years ended September 30, 1997 and 1996, increasing only
$30,000 or 1.3%. While total interest expense did not change dramatically from
year to year, the components of interest expense reflected management's progress
in increasing the level of lower costing money market accounts. While the amount
49
<PAGE>
of year-end deposits only increased $401,000 or 1.0%, the average balance of
money market accounts increased $3.4 million or 46.5% to $10.7 million while the
average balance of time deposits decreased $1.7 million or 5.4% to $28.7
million. The average cost on money market accounts was 4.09% in 1997 as compared
to 3.39% in fiscal 1996, and the average cost of time deposits was 5.30% in
fiscal 1997 versus 5.49% in fiscal 1996. Overall money market rates increased
due to the introduction in 1996 of a tiered money market account with checking
which proved popular with consumers but carried a somewhat higher cost than the
Association's other money market products. The changes in the average balances
of savings, demand, and NOW accounts and the related rates paid were not
significant from fiscal 1996 to 1997.
Interest expense on borrowings increased to $22,000 in fiscal 1997, as the
average amount of borrowed funds increased from $6,000 for fiscal 1996 to
$391,000 in fiscal 1997. Fiscal 1996 interest expense on borrowed funds was less
than $1,000.
The yield on the average balance of interest-bearing liabilities was 4.25% and
4.30% for fiscal 1997 and 1996, respectively.
Net Interest Income. Net interest income increased by approximately $141,000 or
6.1% to $2.5 million for fiscal 1997 from $2.3 million for fiscal 1996. The
average interest rate spread increased to 3.96% for fiscal 1997 from 3.68% for
fiscal 1996. The increase in interest rate spread is primarily the result of an
increase in higher yielding multi-family and commercial real estate loans and
the repricing of home equity loans.
Provision for Loan Losses. The provision for loan losses increased $78,000 or
10.9% to $792,000 for fiscal year 1997 from $714,000 for fiscal year 1996. The
increase in the amount of the provision for fiscal 1997 was based on
management's evaluation of the inherent risk in the Association's loan
portfolio; a $1.6 million or 71.4% increase in non-performing loans to $3.8
million at September 30, 1997 as compared to $2.2 million at September 30, 1996;
significantly increased net loan charge offs amounting to $430,000 in fiscal
1997, $187,000 or 77.0% greater than in 1996; continued expansion of commercial
business and multi-family and commercial real estate lending; the continued
economic weakness in the AssociationOs market area; declining real estate values
collateralizing much of the AssociationOs loan portfolio as well as management's
evaluation of the prospects in the Association's market areas.
Other Income. Other income increased by $46,000 or 42.0% to $155,000 during
fiscal year 1997 from $109,000 for fiscal year 1996. This increase was primarily
due to increases in fees and service charges of $22,000 or 18.4% as well as
fiscal 1996 other income including a $15,000 loss on the writedown of premises
and equipment.
Operating Expense. Operating expenses decreased $652,000 or 21.9% to $2.3
million in fiscal year 1997 from $3.0 million in fiscal year 1996. Compensation
and benefits expenses increased by $66,000 or 8.0% to $892,000 for fiscal year
1997 from $826,000 for fiscal year 1996. The increase in compensation and
benefits expenses in fiscal year 1997 was primarily the result of the general
cost of living and merit raises to Association employees, coupled with increased
pension and health insurance expenses. Director's fees increased by $27,000 or
34.9% from $76,000 in fiscal year 1996 to $103,000 in fiscal year 1997,
reflecting increased meeting frequency and an increase in per meeting fees.
Other real estate expenses increased $46,000 or 170% to $73,000 reflecting
increased costs associated with foreclosures and disposition of other real
estate.
50
<PAGE>
More than offsetting these increases were reductions in the special one-time
FDIC assessment, federal deposit insurance premiums, advertising expenses and
other operating expenses. In fiscal 1996, the Association accrued a special
assessment to recapitalize the SAIF in the amount of $415,000. As a result of
the recapitalization, the Federal deposit insurance premiums decreased in fiscal
1997 by $74,000 or 56.6% to $57,000. Advertising expenses decreased in fiscal
1997 by $29,000 or 21.0% to $111,000. This decrease is due to the inclusion in
fiscal 1996 of significant costs associated with the implementation of a new
logo and brochures and initial use of television advertising which was not
repeated in fiscal 1997. Occupancy expenses and equipment and data processing
expenses were slightly greater in fiscal 1997 as compared to fiscal 1996 with
increases of $13,000 or 5.9% and $9,000 or 2.9%, respectively.
Income Tax Expense. The provision for income taxes increased $307,000 from a
fiscal year 1996 benefit of $222,000 to a fiscal year 1997 expense of $85,000.
The increase in tax expense for fiscal year 1997 as compared to fiscal year 1996
was primarily the result of a $760,000 decrease in the loss before income taxes,
coupled with a $25,000 increase in the change in the valuation allowance for
deferred tax assets. In assessing whether the deferred tax assets will more
likely than not be realized, the Association considers the historical level of
taxable income, the time period over which the temporary differences are
expected to reverse, as well as estimates of future taxable income. In 1997, as
a result of the Association experiencing a second year of significant losses
before taxes (loss before taxes of $498,000 and $1,259,000 in fiscal 1997 and
1996, respectively), continued economic weakness in the Association's market
area, including declining real estate values collateralizing much of the
Association's loan portfolio, and reduced expectations of earnings in the
future, as well as a reduction in the amount of historical taxes available for
carryback in 1997, the Association increased its deferred tax valuation
allowance by $274,000 to $625,000 at September 30, 1997. As of September 30,
1997, the net deferred tax asset is considered to be more likely than not
realizable based upon the remaining amount of historical taxes available for
carryback, amounting to approximately $50,000, the reversal of temporary taxable
items and reliance on future taxable income amounting to approximately $175,000.
ASSET QUALITY
Nonperforming assets include non-accrual loans, troubled debt restructurings and
other real estate properties. Loans are placed on non-accrual status when the
loan is more than 90 days delinquent or when the collection of principal and/or
interest in full becomes doubtful. When loans are designated as non-accrual, all
accrued but unpaid interest is reversed against current period income and
subsequent cash receipts generally are applied to reduce the unpaid principal
balance. As of September 30, 1998 and 1997, there were no loans past due greater
than 90 days and accruing interest or restructured loans accruing interest.
Foreclosed assets include assets acquired in settlement of loans.
Nonperforming assets at September 30, 1998 were $2.1 million or 3.05% of total
assets, compared to $4.1 million or 6.73% of total assets at September 30, 1997.
Nonperforming loans were $1.8 million or 3.52% of gross loans outstanding at
September 30, 1998, a decrease of $2.0 million from $3.8 million or 7.39% of
gross loans outstanding at September 30, 1997.
51
<PAGE>
In fiscal 1997, $2.7 million in one-to-four family residential loans were either
restructured or rewritten, generally at market interest rates, as to which real
estate taxes were previously delinquent and were classified as nonaccruing at
September 30, 1997. During fiscal 1998, $2.4 million of these loans were
reclassified as performing loans as the borrowers had performed under the terms
of the restructured or rewritten loan for twelve consecutive months. Four
one-to-four family residential loans were restructured at market interest rates
during fiscal 1998 totaling $247,000 which were classified as nonaccrual at
September 30, 1998. The total restructured one-to-four family residential
mortgages at September 30, 1998 was $535,000. The restructured loans will be
reclassified as performing loans only after the borrowers perform according to
the new loan terms for twelve consecutive months.
In addition, $359,000 and $1.0 million in one-to-four family residential loans
were classified as nonaccrual at September 30, 1998 and 1997, respectively, due
to delinquency.
At September 30, 1998 there were three commercial real estate loans classified
as nonaccrual. One loan is $411,000 and is secured by a warehouse and office
building located in Saratoga County. The property was obtained by a deed-in-lieu
of foreclosure in November 1998, and both properties are being marketed. Another
loan is $389,000 and is secured by a take-out restaurant located in Saratoga
County. Foreclosure process was begun on this property in December 1998. The
remaining loan is $96,000 and is secured by an office building located in Fulton
County. The borrower continues to make payments on the loan. Management is
actively monitoring the borrower's progress to increase rental income on the
property.
All OREO held at September 30, 1998 and 1997 were one-to-four family residential
properties.
Additionally, at September 30, 1998, the Company has identified approximately
$659,000 in loans having more than normal credit risk. The Company believes that
if economic and/or business conditions change in its lending area, some of these
loans could become nonperforming in the future.
Liquidity
Liquidity is the ability to generate cash flows to meet present, as well as
expected, future funding commitments. Management monitors the Company's
liquidity position on a daily basis and evaluates its ability to meet expected
and unexpected depositor withdrawals and to make new loans and investments. The
Company has historically maintained high levels of liquidity, and manages its
balance sheet so there has been no need for unanticipated sales of Company
assets.
The Company's primary sources of funds for operations are deposits, principal
and interest payments on loans and securities, and to a lesser extent,
borrowings. Net cash provided by operating activities was $728,000 in fiscal
1998, an increase of $998,000 over fiscal 1997. The decrease was primarily
attributable to less of a decrease in accrued expenses in fiscal 1998 as
compared to fiscal 1997, as there were significant non-recurring expenses
accrued in fiscal 1996 paid in fiscal 1997. $4.8 million was used for investing
activities in fiscal 1998, an increase of $4.4 million from fiscal 1997. The
increase was primarily attributable to the Company investing the net proceeds
from the stock offering. Financing activities provided $6.9 million,
representing $5.5 million in net proceeds from the Company's initial public
offering, net of common shares acquired by the Company ESOP, an increase of
$676,000 in deposits and borrowings increasing $700,000 during fiscal 1998.
52
<PAGE>
An important source of the Company's funds is the Association's core deposits.
Management believes that a substantial portion of the Association's deposits are
core deposits. Core deposits are generally considered to be a dependable source
of funds due to long term customer relationships. The Company does not currently
use brokered deposits as a source of funds, and time deposit accounts having
balances equal to or in excess of $100,000 totaled $2.3 million or 4.0% of total
deposits at September 30, 1998. The Association is required to maintain minimum
levels of liquid assets as defined by regulations. The requirement, which may be
varied by OTS depending upon economic conditions and deposit flows, is based
upon a percentage of deposits and short-term borrowings. The OTS required
minimum liquidity ratio is currently 4% and for the quarter ended September 30,
1998, the Association reported average liquidity of 15.51%.
The Association may borrow funds from the FHLB of New York subject to certain
limitations. Based on the level of qualifying collateral available to secure
advances at September 30, 1998, the Association's borrowing limit from the FHLB
of New York was approximately $28.9 million, with $2.0 million outstanding at
that date. Management considers FHLB borrowings a reliable source of funding
that will likely be used in the next year to meet short-term funding needs. In
addition, in order to improve return on equity and increase the return provided
shareholders, FHLB borrowings will be used to fund investment purchases during
fiscal 1999.
The Company is required to maintain a compensating balance of $500,000 at one of
its correspondent banks at September 30, 1998 which is consistent with the prior
year.
At September 30, 1998, the Company had outstanding loan origination commitments,
undisbursed construction loans in process and unadvanced lines of credit of $2.8
million. The Company anticipates that it will have sufficient funds available to
meet its current loan origination and other commitments. Time deposits scheduled
to mature in one year or less from September 30, 1998 totaled $20.8 million.
Based on the Company's most recent experience and pricing strategy, management
believes that a significant portion of such deposits will remain with the
Company.
53
<PAGE>
Adirondack Financial is a unitary savings and loan holding company which is
regulated by the OTS, and although there are no minimum requirements for the
holding company itself, the Association is required to maintain a minimum level
of regulatory capital. The following is a summary of the Association's actual
capital amounts and ratios as of September 30, 1998, compared to the OTS minimum
capital requirements.
At September 30, 1998
------------------------------
(Dollars In Thousands)
Tangible Capital:
Capital level $7,055 10.59%
Requirement 999 1.50%
------ -----
Excess $6,056 9.09%
====== =====
Core Capital:
Capital level $7,055 10.59%
Requirement 1,999 3.00%
------ -----
Excess $5,056 7.59%
====== =====
Total Risk-Based Capital:
Capital level $7,546 19.62%
Requirement 5,330 8.00%
------ -----
Excess $2,216 11.62%
====== =====
Impact of Inflation and Changing Prices
The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increasing costs of
operations. Unlike most industrial companies, nearly all assets and liabilities
of the Company are monetary. As a result, changes in interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation, since interest rates do not necessarily move in the
direction, or to the same extent as, the price of goods and services.
Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 states that comprehensive income includes the reported net
income of a company adjusted for items that are currently accounted for as
direct entries to equity, such as the mark to market adjustment on securities
available for sale, foreign currency items and minimum pension liability
adjustments. This statement is effective for fiscal years beginning after
December 15, 1997. Management does not believe that the impact of adopting this
Statement will be material to the Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for
reporting by public companies about operating segments of their business. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. This statement is effective for
54
<PAGE>
periods beginning after December 15, 1997. Management does not believe that the
impact of adopting this Statement will be material to the Company's consolidated
financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About
Pensions and Other Postretirement Benefits," which amends the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132
standardizes the disclosure of SFAS No. 87 and No. 106 to the extent practical
and recommends a parallel format for presenting information about pensions and
other postretirement benefits. This Statement is applicable to all entities and
addresses disclosure only. The Statement does not change any of the measurement
or recognition provision provided for in SFAS No. 87, No. 88 or No. 106. The
Statement is effective for fiscal years beginning after December 15, 1997.
Management anticipates providing the required disclosures in the September 30,
1999 consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is currently evaluating the impact of this Statement on the Company's
consolidated financial statements.
Year 2000 ("Y2K") Issues
Year 2000 issues are the result of computer programs having been written using
two digits rather than four to define the applicable year. Any of the Company's
programs that have time sensitive software may recognize a date using "00" as
the year 1900 rather than year 2000. This could result in a major system failure
or miscalculations. The Company is also aware of these risks to third parties,
including vendors (and to the extent appropriate, depositors and borrowers), and
the potential adverse impact on the Company that could result from failures by
these parties to adequately address the Year 2000 issues.
The Company processes all customer information on an in-house data processing
system utilizing computer programs from several vendors. Most of the ancillary
programs have a direct interface to the core processing system. In the event of
widespread system failure, a worst case scenario, it will be necessary to
process customer information manually. To mitigate the Y2K risk, the Company has
developed a Y2K Action Plan that was approved by the Board in July 1998. As part
of the Plan, a Y2K Committee was formed to conduct a review of its computer
systems to identify the systems that could be affected by the Y2K problem. The
Y2K Committee reports on a quarterly basis to the Board of Directors as to the
Company's status in resolving any Year 2000 issues.
55
<PAGE>
The Company's Y2K Action Plan identifies seven phases which are as follows:
Phase Description and Company Progress
- ----- --------------------------------
Awareness Informing Company employees at all levels of the potential
issues relative to Year 2000. The Company has completed this
phase of the program.
Inventory Identify the areas within the organization that are subject
to potential Year 2000 problems. The Company has completed
this phase of the program.
Assessment Review the areas identified during the inventory phase to
determine the potential impact on the Company's operations
and financial standing and classify each area on a scale
from highest potential impact to lowest. The Company has
completed this phase of the program.
Analysis Develop procedures necessary to test compliance. The Company
is in the process of testing programs used in areas with the
highest potential impact. It is anticipated that testing
will be completed by December 31, 1998. For programs with
the lowest potential impact, contingency plans will be
developed by March 31, 1999.
Conversion For each program identified as non-compliant, develop a
strategy for upgrading the program or converting to a Y2K
compliant program. In addition, develop contingency and
disaster recovery plans to be used in lieu of testing or in
the event of widespread system failure. Based on the results
of the testing completed, it is not anticipated that any
program conversions will be necessary. Contingency and
disaster recovery plans will be completed by March 31, 1999.
Implementation Migrate from the testing environment to the production
environment any new program versions being tested for Y2K
compliance. Based on the results of the testing completed,
it is not anticipated that there will be any migration of
new program versions required.
Post-
implementation Review contingency plans and disaster recovery plans with
employees. Employee training will commence after March 31,
1999 and be completed by November 30, 1999.
To date, the Y2K Committee has received Year 2000 compliance
certifications/progress forms from all of the Company's vendors. Of the
responses received, 85% of the vendors have certified that they are Y2K
compliant, with the remaining 15% informing the Company of their progress and
anticipated compliance dates; however, no assurance can be given as to the
adequacy of such plans or to the timeliness of their implementation.
Final versions of the Company's Y2K customer evaluation forms and the associated
risk analysis have been completed and Y2K questionnaires have been sent to
customers. A spreadsheet has been developed that identifies significant
borrowers and their level of risk and will be monitored by the Company's Asset
Review Committee. To date, the majority of significant borrowers contacted have
indicated that they are not heavily reliant on computer systems and are,
therefore, evaluated as a low risk pertaining to Y2K.
56
<PAGE>
In fiscal 1997, the Company converted from a third-party core processing
servicer to an in-house system. In addition, the Company also purchased new
general ledger and mortgage origination software during approximately the same
time period. The implementation of the new systems were completed in part to
provide a Y2K compliant operating atmosphere and cost approximately $500,000 to
complete which includes both hardware and software costs. As indicated
previously, the results of the testing performed on the software and hardware
indicates that further renovation is not necessary. To complete the final phases
of the Y2K Plan, it will be necessary to document contingency and disaster
recovery plans which will be completed by Association employees.
Based on the Company's current knowledge and investigations, the expense of the
year 2000 problem as well as the related potential effect on the Company's
earnings is not expected to have a material effect on the Company's financial
position or results of operations. Furthermore, the Company expects corrective
measures required to be prepared for the Year 2000 to be implemented on a timely
basis.
57
<PAGE>
Independent Auditors' Report
The Board of Directors
Adirondack Financial Services Bancorp, Inc.
Gloversville, New York
We have audited the accompanying consolidated statements of financial condition
of Adirondack Financial Services Bancorp, Inc. and subsidiary (the Company) as
of September 30, 1998 and 1997, and the related consolidated statements of
operations, changes in shareholder's equity and cash flows for each of the years
in the three year period ended September 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Adirondack Financial
Services Bancorp, Inc. and subsidiary as of September 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended September 30, 1998 in conformity with generally accepted
accounting principles.
/s KPMG PEAT MARWICK, LLP
October 30, 1998
58
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30,
1998 1997
------------ -----------
Assets
<S> <C> <C>
Cash and due from banks $ 2,635,158 1,922,386
Interest bearing deposits 2,109,873 --
------------ -----------
Total cash and cash equivalents 4,745,031 1,922,386
Securities available for sale 11,172,412 7,017,111
Net loans receivable 50,200,660 49,526,290
Accrued interest receivable 297,959 332,122
Other real estate owned 256,125 312,892
Premises and equipment, net 1,278,383 1,538,364
Prepaid expenses and other assets 290,843 372,642
------------ -----------
Total assets $ 68,241,413 61,021,807
============ ===========
Liabilities and Shareholders Equity
Liabilities:
Deposits:
Demand and N.O.W. accounts 5,741,821 5,147,684
Savings and money market accounts 23,860,849 22,954,408
Time deposit accounts 27,190,796 28,014,594
------------ -----------
Total deposits 56,793,466 56,116,686
Accrued expenses and other liabilities 292,982 325,152
Borrowings and securities sold under agreements to repurchase 2,000,000 1,300,000
------------ -----------
Total liabilities 59,086,448 57,741,838
------------ -----------
Commitments and contingent liabilities (note 11)
Shareholder's equity:
Preferred stock, $.01 par value; 500,000 shares authorized;
none outstanding at September 30, 1998 and 1997 -- --
Common stock, $.01 par value; 5,000,000 shares authorized;
663,243 shares issued and outstanding at September 30, 1998
and none at September 30, 1997 6,632 --
Additional paid-in capital 6,049,293 --
Retained earnings, substantially restricted 3,535,134 3,301,370
Unearned ESOP shares (476,100) --
Net unrealized gain (loss) on securities available for sale,
net of tax 40,006 (21,401)
------------ -----------
Total shareholders' equity 9,154,965 3,279,969
------------ -----------
Total liabilities and shareholders' equity $ 68,241,413 61,021,807
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended September 30,
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 4,356,239 4,409,006 4,131,580
Securities available for sale 466,780 458,932 466,898
Interest bearing deposits 182,576 36,714 134,345
----------- ---------- ----------
Total interest and dividend
income 5,005,595 4,904,652 4,732,823
----------- ---------- ----------
Interest expense:
N.O.W. accounts 95,245 64,841 69,251
Savings and money market accounts 863,097 837,803 679,589
Time deposit accounts 1,441,963 1,522,058 1,667,030
Borrowings 124,827 21,777 178
----------- ---------- ----------
Total interest expense 2,525,132 2,446,479 2,416,048
----------- ---------- ----------
Net interest income 2,480,463 2,458,173 2,316,775
Provision for loan losses 120,000 792,266 714,276
----------- ---------- ----------
Net interest income after provision
for loan losses 2,360,463 1,665,907 1,602,499
----------- ---------- ----------
Other income:
Fees and service charges 160,097 140,309 118,499
Net loss on sale or writedown
of premises and equipment -- -- (15,322)
Other 15,457 14,810 6,091
----------- ---------- ----------
Total other income 175,554 155,119 109,268
----------- ---------- ----------
Other expenses:
Compensation and employee benefits 940,038 892,434 826,360
Occupancy 212,785 224,598 212,054
Federal deposit insurance premiums 55,054 56,665 130,387
Special one-time FDIC assessment -- -- 414,835
Advertising 101,968 110,796 140,291
Directors' fees and expenses 87,853 102,912 76,298
Equipment and data processing 298,407 319,110 310,218
Other real estate expenses 29,715 73,030 27,039
Professional fees 173,689 149,383 90,572
Utilities and postage 60,656 61,280 39,242
Other operating expenses 252,667 328,588 703,001
----------- ---------- ----------
Total other expenses 2,212,832 2,318,796 2,970,297
----------- ---------- ----------
Income (loss) before taxes 323,185 (497,770) (1,258,530)
Income tax expense (benefit) 89,421 85,008 (222,324)
----------- ---------- ----------
Net income (loss) $ 233,764 (582,778) (1,036,206)
=========== ========== ==========
Basic and diluted earnings per share 0.19 N/A N/A
=========== ========== ==========
</TABLE>
For fiscal 1998, earnings per share is calculated using
estimated post-conversion net income (note 1)
See accompanying notes to consolidated financial statements.
60
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Consolidated Statements of Changes in Shareholders' Equity
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Net unrealized
gain (loss) on
Unearned securities
Common Additional Retained ESOP available for
Stock Paid-In-Capital Earnings Shares sale, net of tax Total
----- --------------- -------- ------ ---------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995 $ -- -- 4,920,354 -- (66,334) 4,854,020
Net loss -- -- (1,036,206) -- -- (1,036,206)
Change in net unrealized loss on securities
available for sale, net of tax -- -- -- -- (27,858) (27,858)
--------- ---------- ---------- -------- ---------- ----------
Balance at September 30, 1996 -- -- 3,884,148 -- (94,192) 3,789,956
Net loss -- -- (582,778) -- -- (582,778)
Change in net unrealized loss on securities
available for sale, net of tax -- -- -- -- 72,791 72,791
--------- ---------- ---------- -------- ---------- ----------
Balance at September 30, 1997 -- -- 3,301,370 -- (21,401) 3,279,969
Net income -- -- 233,764 -- -- 233,764
Common stock issued (663,243 shares) 6,632 6,035,380 -- -- -- 6,042,012
Acquisition of common shares by ESOP (52,900 shares) -- -- -- (529,000) -- (529,000)
Allocation of ESOP shares (5,290 shares) -- 13,913 -- 52,900 -- 66,813
Change in net unrealized loss on securities
available for sale, net of tax -- -- -- -- 61,407 61,407
--------- ---------- ---------- -------- ---------- ----------
Balance at September 30, 1998 $ 6,632 6,049,293 3,535,134 (476,100) 40,006 9,154,965
========= ========== ========== ======== ========== ==========
</TABLE>
61
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended September 30,
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 233,764 (582,778) (1,036,206)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation expense 292,884 291,086 227,646
Provision for loan losses 120,000 792,266 714,276
ESOP compensation expense 66,813
Deferred tax (benefit) expense (40,000) 125,000 (55,651)
Writedown of other real estate owned 3,850 33,032 24,300
Net gain on sale of other real estate owned (30,247) (38,881) (76,847)
Net loss on sale or writedown of
premises and equipment -- -- 15,322
Decrease (increase) in accrued interest
receivable 34,163 (2,131) 49,528
Decrease (increase) in prepaid expenses and
other assets 78,760 (12,947) (4,536)
(Decrease) increase in accrued expenses and
other liabilities (32,171) (875,172) 846,553
----------- ---------- ----------
Total adjustments 494,052 312,253 1,740,591
Net cash provided by (used in)
operating activities 727,816 (270,525) 704,385
----------- ---------- ----------
Cash flows from investing activities:
Purchase of securities available for sale (6,729,128) -- (4,601,592)
Proceeds from principal repayment of securities
available for sale 1,678,272 549,575 430,569
Proceeds from maturity and redemption of
securities available for sale 1,000,000 -- 3,700,000
Proceeds from maturity and redemption of
securities held to maturity -- -- 2,500,000
Net increase in loans receivable (1,119,345) (1,193,317) (2,409,148)
Proceeds from sale of other real estate owned 408,139 273,397 462,684
Capital expenditures (32,903) (35,711) (920,326)
----------- ---------- ----------
Net cash used in investing activities (4,794,965) (406,056) (837,813)
----------- ---------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits 676,781 400,886 (2,149,816)
Net increase in borrowings 700,000 1,000,000 300,000
Net proceeds from issuance of common stock 6,042,013 -- --
Acquisition of common stock by ESOP (529,000) -- --
----------- ---------- ----------
Net cash provided by (used in)
financing activities 6,889,794 1,400,886 (1,849,816)
Net increase (decrease) in cash and cash equivalents 2,822,645 724,305 (1,983,244)
Cash and cash equivalents at beginning of year 1,922,386 1,198,081 3,181,325
----------- ---------- ----------
Cash and cash equivalents at end of year $ 4,745,031 1,922,386 1,198,081
=========== ========== ==========
</TABLE>
62
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended September 30,
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Additional disclosures relative to cash flows:
Interest paid $ 2,515,796 2,446,479 2,416,048
============== ========= ==========
Taxes paid (Refunds Received) $ 14,371 (165,891) (83,587)
============== ========= ==========
Supplemental schedule of non-cash investing
and financing activities:
Transfers from loans to other real estate
owned $ 324,975 510,892 297,909
============== ========= ==========
Securities held to maturity transferred to
securities available for sale under the
provisions of the FASBs Special
Report $ -- -- 2,000,000
============== ========= ==========
Change in valuation of securities available
for sale, net of $46,322, $54,913 and ($21,015)
tax effect at September 30, 1998, 1997
and 1996, respectively $ 61,407 72,791 (27,858)
============== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
63
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(1) Summary of Significant Accounting Policies
Adirondack Financial Services Bancorp, Inc. (the Holding Company) was
incorporated under Delaware law in December 1997 as a Holding Company to
purchase 100% of the common stock of Gloversville Federal Savings and Loan
Association (the Association). The Association converted from a mutual form to a
stock institution in April 1998, and the Holding Company completed its initial
public offering on April 6, 1998, at which time the Holding Company purchased
all the outstanding stock of the Association.
The following is a description of the more significant policies which Adirondack
Financial Services Bancorp, Inc. follows in preparing and presenting its
consolidated financial statements.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Adirondack Financial Services Bancorp, Inc. and its wholly owned
subsidiary, Gloversville Federal Savings and Loan Association
collectively referred to as the Company. All significant intercompany
accounts have been eliminated in consolidation. The accounting and
reporting policies of the Company conform in all material respects to
generally accepted accounting principles and to general practice within
the thrift industry.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
A substantial portion of the Association's loans are secured by real
estate in the Upstate New York area, primarily in Fulton, Montgomery
and Saratoga counties. In addition, the other real estate owned is
located in the same market area. Accordingly, the ultimate
collectibility of a substantial portion of the Association's loan
portfolio and the recovery of the carrying amount of other real estate
owned are susceptible to changes in market conditions in these areas.
The determination of the allowance for loan losses and the valuation of
real estate acquired in connection with foreclosures in satisfaction of
loans are based on material estimates that are susceptible to change
based on such factors as economic conditions in the market area
serviced by the Company, financial conditions of individual borrowers,
and changes in underlying collateral values. In connection with the
determination of the allowance for loan losses and the valuation of
other real estate owned, management obtains independent appraisals for
significant properties.
64
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Management believes that the allowance for loan losses and the
valuation of other real estate owned are adequate. While management
uses available information to recognize losses on loans and other real
estate owned, future additions to valuation allowances may be necessary
based on changes in economic conditions, particularly in the Company's
market area. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's
allowance for loan losses and other real estate owned. Such agencies
may require the Company to recognize additions to the allowances based
on their judgments about information available to them at the time of
their examination which may not be currently available to management.
(c) Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all cash
and due from bank balances, interest bearing deposits and similar
investments with maturities of less than three months to be cash and
cash equivalents.
(d) Securities
The Company accounts for securities in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
SFAS No. 115 requires classification of securities into three
categories: trading, available for sale, or held to maturity. The
Company classifies its debt securities, including mortgage backed
securities, as either available for sale or held to maturity, as the
Company does not hold any securities for trading purposes. As of
September 30, 1998 and 1997 all securities were classified as available
for sale.
Available for sale securities are recorded at fair value. Held to
maturity securities are recorded at amortized cost, adjusted for the
amortization of premiums and accretion of discounts. Unrealized holding
gains and losses, net of the related tax effect, on available for sale
securities are excluded from earnings and are reported as a separate
component of equity until realized. Federal Home Loan Bank of New York
stock, a non-marketable equity security, is included in securities
available for sale at cost since there is no readily available fair
value. This investment is required for membership.
A decline in the fair value of any available for sale or held to
maturity security below cost that is deemed other than temporary is
charged to earnings, resulting in the establishment of a new cost basis
for the security.
Interest income includes interest earned on the securities and the
amortization of premiums and accretion of discounts. Amortization and
accretion is recorded using a method that approximates the level-yield
method. Realized gains or losses on securities sold are recognized on
the trade date using the specific identification method.
(e) Reclassification of Investment Securities
In November 1995, the staff of the Financial Accounting Standards Board
released a Special Report, "A Guide to Implementation of Statement 115
on Accounting for Certain Investments
65
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
in Debt and Equity Securities." The Special Report contained a unique
provision that allowed entities to, as of one date between November 15,
1995 and December 31, 1995, reassess the appropriateness of the
classifications of all securities held at that time. In conjunction
with the provisions of the Special Report, dated December 31, 1995, the
Company transferred securities with an amortized cost of $2,000,000 and
an estimated fair value of $1,985,000 from securities held to maturity
to securities available for sale.
(f) Loans Receivable
Loans are carried at the principal amount outstanding less net deferred
loan fees and the allowance for loan losses. Loan fees received and
certain direct loan origination costs are deferred, and the net fee or
cost is amortized into income so as to provide for a level-yield of
interest on the underlying loans. Amortization of related net deferred
fees is suspended when a loan is placed on nonaccrual status.
Interest on loans is recognized on an accrual basis. Loans are
generally placed on nonaccrual status when principal or interest
becomes 90 days or more past due or sooner if management believes it is
prudent to do so. Unpaid interest previously recognized is reversed
when a loan is placed on nonaccrual status. Loans generally remain on
nonaccrual status until past due principal and interest payments are
brought current through cash collections or when, in the opinion of
management, the loans are estimated to be fully collectible as to
principal and interest. The application of payments received (principal
or interest) on non-accrual loans is dependent on the expectation of
ultimate repayment of the loan. If ultimate repayment of the loan is
expected, any payments received are applied in accordance with
contractual terms. If ultimate repayment of princpal is not expected or
management judges it to be prudent, any payment received on a
non-accrual or an impaired loan is applied to principal until ultimate
repayment becomes expected.
An allowance for loan losses is established through a provision charged
to operations. Losses on loans are charged to the allowance for loan
losses when all or a portion of a loan is deemed to be uncollectible.
Recoveries of loans previously charged off are credited to the
allowance when realized. Management's periodic evaluation of the
adequacy of the allowance for loan losses considers known and inherent
risks in the portfolio, adverse situations which may affect the
borrowers' ability to repay, estimated value of underlying collateral,
results of reviews performed on specific problem loans, and current and
prospective economic conditions in the Association's lending area.
Impaired loans are identified and measured in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan", and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures." These Statements prescribe recognition
criteria for loan impairment, and measurement methods for impaired
loans and loans whose terms are modified in troubled-debt
restructurings subsequent to the adoption of these Statements. The
adoption of these Statements on October 1, 1995 did not have a material
effect on the Company's financial statements.
66
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(g) Other Real Estate Owned
Other real estate owned is recorded at the lower of cost (defined as
fair value at initial foreclosure) or fair value of the asset acquired,
less estimated costs to dispose of the property. Costs of developing
and improving such properties are capitalized, where appropriate.
Subsequent declines in the value of other real estate owned and
expenses relating to holding such real estate are charged to operations
as incurred. Other real estate owned consists primarily of residential
properties.
(h) Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over
the estimated useful lives of the related assets.
(i) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets are recognized
subject to management's judgment that those assets will more likely
than not be realized. A valuation allowance is recognized if, based on
an analysis of available evidence, management believes that all or a
portion of deferred tax assets will not be realized. Adjustments to
increase or decrease the valuation allowance are charged or credited,
respectively, to income tax expense. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) Financial Instruments
In the normal course of business, the Company is a party to certain
financial instruments with off-balance-sheet risk, such as commitments
to extend credit, unused lines of credit, and standby letters of
credit. The Company's policy is to record such instruments when funded.
(k) Transfers of Financial Assets and Extinguishment of Liabilities
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
which provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based
on consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial assets that
are sales from transfers that are secured borrowings. SFAS No. 125 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996.
Certain aspects of SFAS No. 125 were amended by SFAS No. 127 "Deferral
of the Effective Date of Certain
67
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Provisions of FASB Statement No. 125." The adoption of SFAS No. 125, as
amended, did not have a material impact on the Company's consolidated
financial statements.
(l) Earnings Per Share
On June 30, 1998, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share," which establishes standards for computing and
presenting earnings per share. SFAS No. 128 supersedes Accounting
Principles Board Opinion No. 15, "Earnings per Share" and related
interpretations. SFAS No. 128 requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all
entities with a complex capital structure and specifies additional
disclosure requirements. Basic earnings per share excludes dilution and
is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity, such as
restricted stock and stock options. Unallocated ESOP shares are not
included in the weighted average number of common shares outstanding
for either the basic or diluted earnings per share calculations.
Earnings per share are presented for estimated earnings from the date
of conversion, April 6, 1998, through September 30, 1998, and are based
on the weighted average number of shares outstanding during this
period, less unallocated ESOP shares. Earnings per share are not
presented for periods prior to the initial stock offering as the
Company was a mutual savings and loan at the time and no stock was
outstanding. For the year ended September 30, 1998, the weighted
average number of shares outstanding was 608,559. There were no
restricted stock plans or stock options that would have had a dilutive
effect on the earnings per share calculation for the year ended
September 30, 1998. The basic and diluted earnings per common share was
$0.19 for the year ended September 30, 1998, based on post conversion
net income of approximately $114,000 for the period from April 6, 1998
through September 30, 1998.
(m) Reclassification
Amounts in the prior periods' consolidated financial statements are
reclassified whenever necessary to conform with the current period's
presentation.
(n) Recent Accounting Pronouncements
In June 1997, the FASB issued "SFAS No. 130", "Reporting Comprehensive
Income". SFAS No. 130 states that comprehensive income includes the
reported net income of a company adjusted for items that are currently
accounted for as direct entries to equity, such as the mark to market
adjustment on securities available for sale, foreign currency items and
minimum pension liability adjustments. This statement is effective for
fiscal years beginning after December 15, 1997. Management does not
believe that the impact of adopting this Statement will be material to
the Company's consolidated financial statements.
68
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes
standards for reporting by public companies of operating segments
wilthin the company, disclosures about products and services,
geographic areas and major customers. This statement is effective for
periods beginning after December 15, 1997. Management believes that the
adoption of SFAS No. 131 will not have a material impact on the
Company's consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which amends the
disclosure requirements of SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88 "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." SFAS No. 132 standardizes the disclosure
of SFAS No. 87 and No. 106 to the extent practical and recommends a
parallel format for presenting information about pensions and other
postretirement benefits. This Statement is applicable to all entities
and addresses disclosure only. The Statement does not change any of the
measurement or recognition provisions provided for in SFAS No. 87, No.
88 or No. 106. The Statement is effective for fiscal years beginning
after December 15, 1997. Management anticipates providing the required
disclosures in the September 30, 1999 consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management is currently
evaluating the impact of this Statement on the Company's consolidated
financial statements.
(2) Conversion to Stock Ownership
On April 6, 1998, the Holding Company sold 661,250 shares of common
stock at $10.00 per share to depositors, employees of the Association,
and employee benefit plan of the Association. Net proceeds from the
sale of stock of the Holding Company, after deducting conversion
expenses of approximately $594,000, were approximately $6.0 million and
are reflected as common stock and additional paid-in-capital in the
accompanying consolidated statements of financial condition. The
Company utilized approximately $4.0 million of the net proceeds to
acquire all of the capital stock of the Association.
As part of the conversion, the Association established a liquidation
account for the benefit of eligible depositors who continue to maintain
their deposit accounts in the Association after the conversion. In the
unlikely event of a complete liquidation of the Association, each
eligible depositor will be entitled to receive a liquidation
distribution from the liquidation account, in the proportionate amount
of the then current adjusted balance for deposit accounts held, before
distribution may be made with respect to the Association's capital
stock. The Association may not declare or pay a cash dividend to the
Holding Company, or repurchase any of its capital stock, if the effect
thereof would cause the retained earnings of the Association to be
reduced below the
69
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
amount required for the liquidation account. Except for such
restrictions, the existence of the liquidation account does not
restrict the use or application of retained earnings.
The Association's capital exceeds all of the fully phased-in regulatory
capital requirements. The Office of Thrift Supervision ("OTS")
regulations provide that an institution that exceeds all fully
phased-in capital requirements before and after a proposed capital
distribution could, after prior notice but without the approval of the
OTS, make capital distributions during the calendar year of up to 100%
of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning
of the calendar year. Any additional capital distributions would
require prior regulatory approval.
Unlike the Association, the Holding Company is not subject to these
regulatory restrictions on the payment of dividends to its
stockholders.
(3) Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and estimated
fair values of securities available for sale at September 30, 1998 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------- ------- ----------
<S> <C> <C> <C> <C>
Debt securities:
- ----------------
Certificates of deposit $ 400,000 -- -- 400,000
U.S. Government agency obligations 6,252,461 49,489 -- 6,301,950
Mortgage backed securities 3,938,665 51,231 (30,534) 3,959,362
----------- ------- ------- ----------
Total debt securities 10,591,126 100,720 (30,534) 10,661,312
Non-marketable equity securities:
- ---------------------------------
Equity securities 50,000 -- -- 50,000
Stock in FHLB 461,100 -- -- 461,100
----------- ------- ------- ----------
Total securities
available for sale $11,102,226 100,720 (30,534) 11,172,412
=========== ======= ======= ==========
</TABLE>
70
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------- ------- ---------
<S> <C> <C> <C> <C>
Debt securities:
- ----------------
U.S. Government agency obligations $2,998,160 1,867 (6,020) 2,994,007
Mortgage backed securities 3,595,397 14,059 (47,452) 3,562,004
---------- ------ ------- ---------
Total debt securities 6,593,557 15,926 (53,472) 6,556,011
Non-marketable equity securities:
- ---------------------------------
Stock in FHLB 461,100 -- -- 461,100
---------- ------ ------- ---------
Total securities
available for sale $7,054,657 15,926 (53,472) 7,017,111
========== ====== ======= =========
</TABLE>
At September 30, 1998 and 1997, mortgage backed securities consisted of Federal
Home Loan Mortgage Corporation (FHLMC), Government National Mortgage Association
(GNMA) and Federal National Mortgage Association (FNMA) securities.
The following sets forth information with regard to remaining contractual
maturities of debt securities available for sale as of September 30, 1998
(mortgage backed securities are included based on the final contractual maturity
date):
Estimated
Amortized Fair
Cost Value
----------- ----------
Within one year $ 2,900,000 2,900,315
From one to five years 749,484 758,733
From five to ten years 3,002,461 3,046,715
After ten years 3,939,181 3,955,549
----------- ----------
$10,591,126 10,661,312
=========== ==========
Actual maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
There were no security sales for the years ended September 30, 1998, 1997 and
1996.
71
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(4) Net Loans Receivable
Net loans receivable at September 30, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Loans secured by real estate:
Residential one-to-four family $ 35,705,911 36,890,541
Multi-family and commercial 8,614,288 7,949,702
Residential one-to-four family construction 606,420 539,284
------------ ----------
Total loans secured by real estate 44,926,619 45,379,527
------------ ----------
Other loans:
Commercial business 2,623,429 1,421,581
Home equity 3,143,015 3,379,775
Other consumer 1,122,087 1,111,559
------------ ----------
Total other loans 6,888,531 5,912,915
------------ ----------
Gross loans receivable 51,815,150 51,292,442
Less:
Net deferred loan fees (118,734) (153,171)
Allowance for loan losses (1,495,756) (1,612,981)
------------ ----------
Net loans receivable $ 50,200,660 49,526,290
============ ==========
</TABLE>
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year $ 1,612,981 1,250,610 779,417
Charge-offs (315,960) (466,182) (254,364)
Recoveries 78,735 36,287 11,281
Provision charged to operations 120,000 792,266 714,276
----------- --------- ---------
Balance at end of year $ 1,495,756 1,612,981 1,250,610
=========== ========= =========
</TABLE>
Non-performing loans consist of loans on nonaccrual status at September
30, 1998, 1997 and 1996 amounting to $1.8 million, $3.8 million and
$2.2 million, respectively. There were no loans past due as to
principal or interest greater than 90 days and still accruing interest
or accruing loans in a trouble debt restructuring as of September 30,
1998, 1997 or 1996. Included in nonaccrual loans at September 30, 1998
and 1997 are approximately $550,000 and $1.6 million of loans
restructured in trouble debt restructurings, respectively.
During 1998 and 1997, certain loans with past due property taxes were
either rewritten to provide the borrowers with amounts necessary to pay
past due property taxes or the loans were restructured in trouble debt
restructuring (but generally at market rates) to provide the borrowers
with amounts necessary to pay past due property taxes. Loans
restructured due to past due property taxes and included in
non-accruing loans at September 30, 1998 totaled $550,000. Loans
rewritten and loans restructured due to past due property taxes at
September 30, 1997 totaled $1.1 million and $1.6 million, respectively.
72
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Interest income which would have been recorded under the original terms
of the above nonaccrual loans for the years ended September 30, 1998,
1997 and 1996 was approximately $174,000, $343,000 and $230,000,
respectively. Interest income recognized on the above nonaccrual loans
for the years ended September 30, 1998, 1997 and 1996 was
approximately, $143,000, $304,000 and $84,000. There are no commitments
to extend further credit on nonaccrual loans.
Under SFAS No. 114, a loan (generally commercial-type loans) is
considered impaired when it is probable that the borrower will be
unable to repay the loan according to the original contractual terms of
the loan agreement or when a loan (of any loan type) is restructured in
a trouble debt restructuring. The allowance for loan losses related to
impaired loans is based on discounted cash flows using the loans
initial effective interest rate or the fair value of the collateral for
loans where repayment of the loan is expected to be provided solely by
the underlying collateral (collateral dependent loans).
As of September 30, 1998 and 1997, the recorded investment in loans
that were considered to be impaired under SFAS No. 114 totaled
approximately $1.5 million and $1.6 million, respectively, for which
the related allowance for loan losses was approximately $517,000 and
$334,700, respectively. During the years ended September 30, 1998, 1997
and 1996, the average balance of impaired loans was approximately $1.3
million, $799,000 and $0, respectively. Interest income collected on
the impaired loans during the years ended September 30, 1998, 1997 and
1996, was approximately $129,000, $153,000 and $0, respectively. There
were no impaired loans at September 30, 1996.
Certain directors and executive officers of the Company have had loan
transactions with the Company in the ordinary course of business on
substantially the same terms, including interest rates and collateral,
as comparable loans made to others. Total loans to directors and
executive officers amounted to approximately $394,000 and $381,000 at
September 30, 1998 and 1997, respectively. During the year ended
September 30, 1998, new loans of approximately $57,000 were made to
directors or executive officers, and repayments totaled approximately
$44,000.
(5) Accrued Interest Receivable
A summary of accrued interest receivable at September 30, 1998 and 1997
is as follows:
1998 1997
-------- -------
Loans $214,920 271,986
Securities available for sale 81,577 60,136
Interest bearing deposits 1,462 --
-------- -------
Total $297,959 332,122
======== =======
73
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(6) Premises and Equipment
Premises and equipment at September 30, 1998 and 1997 are summarized by
major classifications as follows:
1998 1997
----------- ---------
Land $ 140,215 140,215
Buildings 1,244,728 1,278,156
Furniture and fixtures 1,135,962 1,124,289
----------- ---------
Total 2,520,905 2,542,660
Less accumulated depreciation (1,242,522) (1,004,296)
----------- ---------
Premises and equipment, net $ 1,278,383 1,538,364
=========== =========
Amounts charged to non-interest expense for depreciation of premises
and equipment amounted to $292,884, $291,086 and $227,646 in 1998, 1997
and 1996, respectively.
(7) Deposits
Deposit account balances at September 30, 1998 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Demand accounts (non-interest bearing) $ 1,089,001 1,021,123
----------- ----------
N.O.W. accounts (1.75%) 4,652,820 4,126,561
----------- ----------
Passbook and statement savings accounts (up
to 4.00%) 11,297,213 12,004,406
Money market accounts (up to 4.88%) 12,563,636 10,950,002
----------- ----------
23,860,849 22,954,408
----------- ----------
Time deposit accounts:
Under 4.00% 85 2,624
4.00 - 4.99% 2,721,099 3,993,984
5.00 - 5.99% 23,256,541 21,942,237
6.00 - 6.99% 1,180,806 2,045,965
7.00 and over 32,265 29,784
----------- ----------
27,190,796 28,014,594
----------- ----------
$56,793,466 56,116,686
=========== ==========
</TABLE>
At September 30, 1998 and 1997, the aggregate amount of time deposit
accounts with a balance equal to or in excess of $100,000 was
$2,283,536 and $2,492,469, respectively. At September 30, 1998 and
1997, the aggregate amount of escrow deposits was not significant, and
are included in savings and money market accounts.
74
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Contractual maturities of time deposit accounts at September 30, 1998
are as follows:
Years ending September 30,
1999 $ 20,750,534
2000 3,878,707
2001 1,066,517
2002 829,817
2003 591,002
Thereafter 74,219
--------------
$ 27,190,796
==============
Certain executive officers and directors of the Company, as well as
certain affiliates of these officers and directors, were customers of
and had deposit balances with the Association in the ordinary course of
business. The aggregate of such deposits was approximately $490,000 and
$681,000 as of September 30, 1998 and 1997, respectively.
(8) Borrowings
The Company had approximately $28.9 million and $9.2 million of
available lines of credit with the FHLB as of September 30, 1998 and
1997, respectively. Substantially all of the assets of the Company have
been pledged as collateral related to this line of credit.
Information concerning FHLB borrowings in 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Amount outstanding at September 30 $2,000,000 --
Maximum amount outstanding at any month end 2,000,000 850,000
Average amount outstanding 1,344,384 272,726
Weighted average interest rate:
For the year 5.68% 5.56%
As of year end 5.68% --
</TABLE>
Information concerning securities sold under agreements to repurchase
in 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Amount outstanding at September 30, $ -- 1,300,000
Maximum outstanding at any month end 1,500,000 1,300,000
Average amount outstanding 127,397 118,274
Weighted average interest rate:
For the year 5.80% 5.78%
As of year end -- 5.80%
</TABLE>
Securities underlying the repurchase agreements remain under the
control of the Company. Repurchase agreements are typically entered
into for one to three day periods.
75
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(9) Income Taxes
The components of the income tax expense (benefit) for the years ended
September 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Current tax (benefit) expense:
Federal $ 102,494 (40,248) (166,929)
State 26,927 256 256
Deferred tax (benefit) expense (40,000) 125,000 (55,651)
--------- ------ --------
$ 89,421 85,008 (222,324)
========= ====== ========
</TABLE>
The actual tax expense (benefit) for the years ended September 30,
1998, 1997 and 1996 differs from expected tax expense (benefit),
computed by applying the Federal corporate tax rate of 34% to income
(loss) before taxes as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Expected tax expense (benefit) $ 109,883 (169,242) (427,900)
Change in valuation allowance for deferred tax asset (49,338) 273,510 248,426
New York State tax 19,159 (22,107) (45,443)
Other items 9,717 2,847 2,593
--------- ------ --------
$ 89,421 85,008 (222,324)
========= ====== ========
</TABLE>
The tax effects of temporary differences that give rise to the
Association's deferred tax assets and liabilities at September 30, 1998
and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
Deferred tax assets:
Differences in reporting the provision for
loan losses and the tax bad debt
deduction $ 581,902 628,792
Deferred net loan origination fees 47,494 61,268
Differences in reporting accrued expenses 90,126 73,393
Other 60,732 14,010
--------- -------
Total gross deferred tax assets 780,254 777,463
Valuation allowance (575,714) (625,052)
--------- -------
Deferred tax assets, net of valuation
allowance 204,540 152,411
--------- -------
Deferred tax liabilities:
Depreciation (23,080) (9,540)
Net effect of other real estate owned transactions (21,460) (22,871)
--------- -------
Total gross deferred tax liabilities (44,540) (32,411)
--------- -------
Net deferred tax asset at end of year 160,000 120,000
Net deferred tax asset at beginning of year 120,000 245,000
--------- -------
Deferred tax expense (benefit) for the year $ (40,000) 125,000
========= =======
</TABLE>
76
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
In addition to the deferred tax assets described above, the Association
had a deferred tax (liability) asset of $(30,180) and $16,145 at
September 30, 1998 and 1997, respectively, related to the net
unrealized gain/loss on securities available for sale, at September 30,
1998 and 1997, respectively.
During fiscal 1998, the deferred tax asset valuation allowance was
reduced by $49,338 from $625,052 to $575,714. This reduction was based
on the Company's fiscal 1998 increased pre-tax income and the Company's
increased future taxable income projections. As a result of the
Association experiencing a second year of significant losses before
taxes, continued economic weakness in the Association's market area,
including declining real estate values collateralizing much of the
Association's loan portfolio, reduced expectations of earnings in the
future, as well as a reduction in the amount of historical taxes
available for carryback in 1997, the Association increased the deferred
tax valuation allowance in 1997 by $273,510 to $625,052. In assessing
whether deferred tax assets will more likely than not be realized,
management considers the historical level of taxable income, the time
period over which the temporary differences are expected to reverse, as
well as estimates of future taxable income. As of September 30, 1998,
the net deferred tax asset is considered to be more likely then not
realizable based upon the historical level of taxable income available
for carryback, amounting to approximately $173 thousand, the reversal
of temporary taxable items and reliance on future taxable income
amounting to approximately $225 thousand.
As a thrift institution, the Association is subject to special
provisions in the Federal and New York State tax laws regarding its
allowable tax bad debt deductions and related tax bad debt reserves.
These deductions historically have been determined using methods based
on loss experience or a percentage of taxable income. Tax bad debt
reserves are maintained equal to the excess of allowable deductions
over actual bad debt losses and other reserve reductions. These
reserves consist of a defined base-year amount, plus additional amounts
("excess reserves") accumulated after the base year. SFAS No. 109
requires recognition of deferred tax liabilities with respect to such
excess reserves, as well as any portion of the base-year amount which
is expected to become taxable (or "recaptured") in the foreseeable
future.
Certain amendments to the Federal and New York State tax laws regarding
bad debt deductions were enacted in July and August 1996. The Federal
amendments include elimination of the percentage of taxable income
method for tax years beginning after December 31, 1995, and imposition
of a requirement to recapture into taxable income (over a period of
approximately six years) the bad debt reserves in excess of the
base-year amounts. The Association previously established, and will
continue to maintain, a deferred tax liability with respect to such
excess Federal reserves. The New York State amendments redesignate the
Association's state bad debt reserves at December 31, 1995 as the
base-year amount and also provide for future additions to the base-year
reserve using the percentage of taxable income method.
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the Federal and state base-year reserves
since the Association does not expect that these reserves will become
taxable in the foreseeable future. At September 30, 1998, the Federal
base year reserve was approximately $1.3 million and the state
base-year reserve was not significant. Under New York State tax law, as
amended, events that would result in taxation of the state reserves
include the failure of the Association to maintain a specified
qualifying assets ratio or meet other
77
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
thrift definition tests for tax purposes. The unrecognized tax
liability at September 30, 1998 with respect to the Federal base-year
reserve was approximately $440 thousand.
(10) Employee Benefits
(a) 401(k) Savings Plan
Effective January 1, 1995, the Association established a
defined contribution plan ("the Plan") that is intended to
qualify under section 401(k) of the Internal Revenue Code. The
Plan covers all employees with at least six months of service.
The Association's contributions to the Plan are discretionary
and determined annually by the Board of Directors. Employee
contributions are voluntary. Employees vest immediately in
their own contributions, and vest in the Company's
contributions based on years of service. For the years ended
September 30, 1998, 1997 and 1996, the Association's
contributions to the Plan were approximately $17,000, $57,000
and $45,000, respectively.
(b) Employee Stock Ownership Plan
As part of the conversion discussed in note 2, an employee
stock ownership plan (ESOP) was established to provide
substantially all employees of the Company the opportunity to
also become stockholders. The ESOP borrowed $529,000 from the
Company and used the funds to purchase 52,900 shares of common
stock of the Company issued in the conversion. The loan will
be repaid principally from the Company's discretionary
contributions to the ESOP over a period of ten years. At
September 30, 1998, the loan had an outstanding balance of
$529,000 and an interest rate of 5.98%. Both the loan
obligation and the unearned compensation are reduced by the
amount of loan repayments made by the ESOP. Shares purchased
with the loan proceeds are held in a suspense for allocation
among participants as the loan is repaid. Contributions to the
ESOP and shares released from the suspense account are
allocated among participants on the basis of compensation in
the year of allocation.
The Company accounts for the ESOP in accordance with the
American Institute of Certified Public Accountants Statement
of Position No. 93-6 "Employees' Accounting For Stock
Ownership Plans" (SOP 93-6). Accordingly, the shares pledged
as collateral are reported as unearned ESOP shares in
shareholders' equity. As shares are released or committed to
be released from collateral, the Company reports compensation
expense equal to the average market price of the shares
(during the applicable service period), and the shares become
outstanding for earnings per share computations. Unallocated
ESOP shares are not included in the earnings per share
computations. The Company recorded approximately $67,000 of
compensation expense under the ESOP during the year ended
September 30, 1998.
The ESOP shares as of September 30, 1998 were as follows:
Allocated shares --
Shares committed to be allocated 5,290
Unallocated shares 47,610
---------
52,900
=========
Approximate fair value of
unallocated shares at
September 30, 1998 $ 595,125
=========
78
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(11) Commitments and Contingent Liabilities
(a) Legal Proceedings
The Company is, from time to time, a defendant in legal
proceedings relating to the conduct of its business. In the
best judgment of management, the financial position of the
Company will not be affected materially by the outcome of any
pending legal proceedings.
(b) Off-Balance Sheet Financing and Concentrations of Credit
The Company is a party to certain financial instruments with
off-balance sheet risk in the normal course of business to
meet the financing needs of its customers. These financial
instruments include the Association's commitments to extend
credit and commercial lines of credit. Financial instruments
involve, to varying degrees, elements of credit risk in excess
of the amount recognized on the consolidated statements of
financial condition. The contract amounts of these instruments
reflect the extent of involvement the Association has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the commitments to extend
credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies
in making commitments as it does for on-balance sheet
instruments.
Commitments to extend credit may be written on a fixed rate
basis exposing the Company to interest rate risk given the
possibility that market rates may change between commitment
and actual extension of credit.
Unless otherwise noted, the Company does not require
collateral or other security to support off-balance-sheet
financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected
to expire without being fully drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
The Association evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral, if any,
required by the Association upon the extension of credit is
based on management's credit evaluation of the customer.
Mortgage commitments are secured by a first lien on real
estate. Collateral on extensions of credit for commercial
loans varies but may include property, plant and equipment,
and income producing commercial property.
79
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Contract amounts of financial instruments that represent the
future extension of credit as of September 30, 1998 and 1997
at fixed and variable interest rates are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------
Fixed Variable Total
---------- --------- ---------
<S> <C> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Residential (one-to-four-
family) $ 582,151 -- 582,151
Multi-family and commercial 155,000 35,000 190,000
Construction 695,930 -- 695,930
Commercial business -- 338,397 338,397
Home equity 80,000 924,993 1,004,993
---------- --------- ---------
$1,513,081 1,298,390 2,811,471
========== ========= =========
1997
------------------------------------------
Fixed Variable Total
---------- --------- ---------
Financial instruments whose contract
amounts represent credit risk:
Residential (one-to-four-
family) $ 387,400 -- 387,400
Multi-family and commercial -- 1,008,939 1,008,939
Construction 306,260 3,006 309,266
Commercial business -- 375,604 375,604
Home equity -- 942,202 942,202
Other consumer 114,527 -- 114,527
---------- --------- ---------
$ 808,187 2,329,751 3,137,938
========== ========= =========
</TABLE>
The range of interest on fixed rate commitments was 7.00% to
10.00% at September 30, 1998 and 7.625% to 10.250% at
September 30, 1997. The range of interest on adjustable rate
commitments was 8.00% to 11.00% at September 30, 1998 and
7.00% to 11.00% at September 30, 1997, respectively.
At September 30, 1998 and 1997, the Association was required
to maintain a $500,000 compensating balance with a
correspondent bank.
(c) Interest Rate Risk
The principal assets of the Company are long-term, fixed rate
first mortgage loans which have been primarily funded by
deposits. Accordingly, increases in interest rates paid on
deposit accounts will have an adverse effect on the Company's
overall interest margins. In response to this situation, the
Company has begun programs offering one year adjustable rate
mortgages, three to five year adjustable rate multi-family and
commercial loans, commercial business loans, home equity
loans, and variable rate line of credit accounts to loan
customers in order to more closely match the pricing of
earning assets with their sources of funds on a prospective
basis.
80
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(12) Savings Association Insurance Fund - Special Assessment
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
Act) was enacted into law. The Act included, among other things,
provisions to recapitalize the Savings Association Insurance Fund
(SAIF) through a special assessment, as well as provisions calling for
a future merger of the SAIF with the Bank Insurance Fund.
As a result of the Act, SAIF members were required to pay a special
assessment to recapitalize the SAIF based on insured deposits held on
March 31, 1995. The amount of the special SAIF assessment as determined
by the FDIC was 65.7 basis points. Based upon the Association's insured
deposits on March 31, 1995, the special assessment amounted to
$414,835.
(13) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires that the Company disclose estimated fair values for certain
financial instruments. SFAS No. 107 defines fair value of financial
instruments as the amount at which the instrument could be exchanged in
a current transaction between willing parties other than in a forced or
liquidation sale.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected net
cash flows, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include the deferred tax asset and bank premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates of fair value
under SFAS No. 107.
In addition there are intangible assets that SFAS No. 107 does not
recognize, such as the value of "core deposits," the Association's
branch network and other items generally referred to as "goodwill."
Securities Available for Sale
Securities available for sale are financial instruments which are
usually traded in broad markets. Fair values are based upon bid
quotations received from either quotation services or securities
dealers. The estimated fair value of stock in the Federal Home Loan
Bank of New York is assumed to be its cost given the lack of a public
market available for this investment.
81
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as single
family loans, consumer loans and commercial loans. Each loan category
is further segmented into fixed and adjustable rate interest terms and
by performing and nonperforming categories.
The fair value of performing loans, is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based on the
contractual term of the loans to maturity taking into consideration
certain prepayment assumptions.
Fair value for significant non-performing loans may be based on recent
external appraisals or discounting of cash flows. Estimated cash flows
are discounted using a rate commensurate with the risk associated with
the estimated cash flows. Assumptions regarding credit risk, cash
flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
Deposit Liabilities
Under SFAS No. 107, the fair value of deposits with no stated maturity,
such as non-interest bearing demand deposit, savings accounts, NOW
accounts, and money market accounts, must be stated at the amount
payable on demand as of September 30, 1998 and 1997. The fair value of
time deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered
for deposits of similar remaining maturities.
Other Items
The following items are considered to have a fair value equal to
carrying value due to the nature of the financial instrument and the
period within which it will be settled: cash and cash equivalents,
accrued interest receivable, accrued interest payable, and borrowings.
82
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments as of
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,745,031 4,745,031 1,922,386 1,922,386
Securities available for sale 11,172,412 11,172,412 7,017,111 7,017,111
Net Loans 50,200,660 51,005,253 49,526,290 49,959,626
Accrued interest receivable 297,959 297,959 332,122 332,122
Financial liabilities:
Deposits:
Demand, savings, money market, and NOW accounts 29,602,670 29,602,670 28,102,092 28,102,092
Time deposits 27,190,796 27,190,796 28,014,594 28,014,594
Borrowings and securities sold under agreements to repurchase 2,000,000 2,000,000 1,300,000 1,300,000
</TABLE>
Commitments to Extend Credit
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present credit
worthiness of the counterparties. For fixed rate loan commitments, fair
value also considers the difference between current levels of interest
rates and the committed rates. Fees, such as these are not a major part
of the Company's business and in the Company's business territory are
not a "normal business practice." Therefore, based upon the above facts
the Company believes that book value equals fair value and the amounts
are not significant.
(14) Regulatory Capital Requirements
OTS capital regulations require savings institutions to maintain
minimum levels of regulatory capital. Under the regulations in effect
at September 30, 1998 and 1997, the Association was required to
maintain a minimum ratio of tangible capital to tangible assets of
1.5%; a minimum leverage ratio of core (Tier I) capital to total
adjusted tangible assets of 4.0% for 1998 and 3.0% for 1997; and a
minimum ratio of total capital (core capital and supplementary capital)
to risk weighted assets of 8.0%, of which 4.0% must be core (Tier I)
capital.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the
classification of savings institutions into five
83
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
categories: well capitalized, adequately capitalized, under
capitalized, significantly under capitalized, and critically under
capitalized. Generally an institution is considered well capitalized if
it has a core (Tier I) capital ratio of at least 5.0% (based on
quarterly average total assets); a core (Tier I) risk based capital
ratio of at least 6.0%; and a total risk based capital ratio of at
least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS
about capital components, risk weightings and other factors.
Management believes that, as of September 30, 1998 and 1997, the
Association meets all capital adequacy requirements to which it is
subject. Further, the most recent OTS notification categorized the
Association as a well-capitalized institution under the prompt
corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the
Association's capital classification.
The following is a summary of the Association's actual capital amounts
and ratios as of September 30, 1998 and 1997. Although the OTS capital
regulations apply at the Association level only, the Company's
consolidated capital amounts and ratios are also presented. The OTS
does not have a holding company capital requirement.
September 30, 1998 September 30, 1997
Actual Actual
------------------ ------------------
Amount Ratio Amount Ratio
--------- ----- --------- -----
Association
-----------
Tangible capital $7,055,274 10.59% 3,301,370 5.41%
Tier I (core) capital 7,055,274 10.59% 3,301,370 5.41%
Risk-based capital:
Tier I 7,055,274 18.34% 3,301,370 8.48%
Total 7,546,487 19.62% 3,787,762 10.01%
September 30, 1998
Actual
----------------------
Amount Ratio
---------- -----
Consolidated
------------
Tangible capital $9,114,959 13.36%
Core (Tier I) capital 9,114,959 13.36%
Core (Tier I) risk-based capital 9,114,959 23.54%
Total risk-based capital 9,609,947 24.82%
The OTS may reduce an institution's regulatory capital for interest
rate risk exposure (as determined by the OTS) if the institution's
risk-based capital ratio is less than 12% and the OTS notifies the
institution of such reduction. The Association has not been notified by
the OTS of any reduction to its regulatory capital for interest rate
risk exposure.
84
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(15) Holding Company Financial Information
The following information presents the financial position of Adirondack
Financial Services Bancorp, Inc. (Holding Company) as of September 30,
1998, and the results of its operations and cash flows for the period
from April 6, 1998 to September 30, 1998. The Holding Company began
operations on April 6, 1998 in conjunction with the Association's
mutual-to-stock conversion and the Company's initial public offering of
its common stock.
Statement of Financial Condition
September 30, 1998
Assets
------
Cash and cash equivalents $1,533,585
Securities available for sale 50,000
Loan receivable from subsidiary 529,000
Equity in net assets of subsidiary 7,042,380
----------
Total assets $9,154,965
==========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities --
Shareholders' equity 9,154,965
----------
Total liabilities and shareholders' equity $9,154,965
==========
Statement of Income
For the period from April 6, 1998 to September 30, 1998
Interest income $ 66,368
Interest expense 24,634
----------
Net interest income 41,734
Non-interest expense 12,281
----------
Income before income tax expense and
equity in undistributed earnings of
subsidiary 29,453
Income tax expense 11,781
----------
Income before equity in undistributed earnings of subsidiary 17,672
Equity in undistributed earnings of subsidiary 216,092
----------
Net income $ 233,764
==========
85
<PAGE>
ADIRONDACK FINANCIAL SERVICES BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Statement of Cash Flows
For the period from April 6, 1998 to September 30, 1998
Cash flows from operating activities:
Net income $ 233,764
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of
subsidiary (216,092)
----------
Net cash provided by operating activities 17,672
----------
Cash flows from investing activities:
Net increase in loans from subsidiary (529,000)
Purchase of subsidiary common stock (3,947,100)
Purchase of securities available for sale (50,000)
----------
Net cash used by investing activities (4,526,100)
----------
Cash flows from financing activities:
Net proceeds from common stock issued 6,042,013
----------
Net cash provided by financing
activities 6,042,013
----------
Net increase in cash and cash equivalents 1,533,585
Cash and cash equivalents at beginning of period --
----------
Cash and cash equivalents at end of period $ 1,533,585
==========
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
(16) Subsequent Event
On October 7, 1998, at a special meeting of shareholders, the
shareholders approved a recognition and retention plan ("RRP") and a
stock option plan for the benefit of employees, officers and directors
of the Company.
Under the RRP 26,450 shares of the Company's common stock (4%) of the
number of shares issued in the conversion will be available for award
to employees, officers and directors of the Company in a manner
designed to encourage such persons to remain with the Company. With the
approval of the plan, 25,123 common shares were awarded and will vest
on the anniversary of the date of shareholder approval at an annual
rate of 20%. The Company funded the RRP from authorized but unissued
shares.
Under the stock option plan, 66,125 stock options (10% of the number of
shares issued in the conversion) will be available for award to
employees, officers and directors of the Company. With the approval of
the plan, 62,820 stock options were granted and will vest on the
anniversary of the date of shareholder approval at an annual rate of
20%. The Company has not made a final determination whether the common
stock required by the stock option plan will be purchased in the market
or issued from authorized and unissued.
86
<PAGE>
Shareholder Information
Corporate Office
Adirondack Financial Services Bancorp, Inc.
52 North Main Street
Gloversville, NY 12078
Annual Meeting
The annual meeting of Adirondack Financial Services Bancorp, Inc. will be held
at 4:00 PM, Thursday, March 4, 1999 at the Association's offices at 52 North
Main Street, Gloversville, NY.
Form 10-K
For the 1998 fiscal year, Adirondack Financial will file an Annual Report on
Form 10-K. Shareholders wishing a copy may obtain one free of charge by writing:
Menzo D. Case
Corporate Secretary
Adirondack Financial Services Bancorp, Inc.
52 North Main Street
Gloversville, NY 12078
Transfer Agent and Registrar
Registrar & Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
Counsel
Silver, Freedman & Taff, LLP
1100 New York Avenue, NW
Suite 700 East
Washington, DC 20005
Independent Auditors
KPMG Peat Marwick LLP
515 Broadway
Albany, NY 12207
Common Stock
The common stock of Adirondack Financial Services Bancorp, Inc. trades
over-the-counter on the NASDAQ stock market under the symbol AFSB.
At December 22, 1998, there were approximately 179 shareholders of record.
Adirondack Financial Services Bancorp, Inc. common stock was issued at $10.00
per share in connection with the Company's initial public offering completed
April 6, 1998. Quotations are available through the OTC Bulletin Board. The
following table shows the range of high and low sale prices for each quarterly
period since the Company began trading in April:
1998 High Low
Third Quarter $14.13 $10.00
Fourth Quarter $14.00 $11.50
As of September 30, 1998, the Company had not declared any dividends on its
Common Stock. Dividend payment decisions are made with consideration of a
variety of factors including earnings, financial condition, market
considerations and regulatory restrictions. Restrictions on dividend payments
are describe in Note 2 of the Notes to Consolidated Financial Statements
included in this Annual Report.
87
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,635
<INT-BEARING-DEPOSITS> 2,110
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,172
<INVESTMENTS-CARRYING> 11,102
<INVESTMENTS-MARKET> 11,172
<LOANS> 51,815
<ALLOWANCE> 1,496
<TOTAL-ASSETS> 68,241
<DEPOSITS> 56,793
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 293
<LONG-TERM> 0
0
0
<COMMON> 7
<OTHER-SE> 9,148
<TOTAL-LIABILITIES-AND-EQUITY> 68,241
<INTEREST-LOAN> 4,356
<INTEREST-INVEST> 467
<INTEREST-OTHER> 183
<INTEREST-TOTAL> 5,006
<INTEREST-DEPOSIT> 2,400
<INTEREST-EXPENSE> 125
<INTEREST-INCOME-NET> 2,481
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,213
<INCOME-PRETAX> 323
<INCOME-PRE-EXTRAORDINARY> 323
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
<YIELD-ACTUAL> 4.02
<LOANS-NON> 1,826
<LOANS-PAST> 0
<LOANS-TROUBLED> 550
<LOANS-PROBLEM> 659
<ALLOWANCE-OPEN> 1,613
<CHARGE-OFFS> 316
<RECOVERIES> 79
<ALLOWANCE-CLOSE> 1,496
<ALLOWANCE-DOMESTIC> 1,237
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 259
</TABLE>
